Copyrighted  1922 

BY 

Benjamin  H.  Dugdale 


MORTGAGE 
LOAN  VALUES 


A  Few  Comments  on  Various  Matters 
Pertaining  to  Real  Estate  Mortgages 


B}^ 


BENJAMIN  H.  DUGDALE 


PREFACE 

Mortgage  Loan  Values  is,  as  its  sub-title  states,  a 
series  of  "comments  upon  various  matters  pertaining 
to  the  mortgage  loan  business. ' ' 

This  book  is  intended  for  the  use  of  investors  in 
Real  Estate  mortgages  and  of  those  persons  who  may 
be  called  upon  to  act  in  an  advisory  capacity  to  such 
investors  in  passing  judgment  upon  the  physical, 
moral  or  legal  features  of  Real  Estate  securities. 

None  such  can  read  it  without  profit  and  few,  hav- 
ing once  read  it,  will  be  willing  to  dispense  with  it  as 
a  reference  book,  for  it  will  often  enable  them  to 
avoid  errors  which  might  result  in  unsatisfactory 
experiences. 

The  treatment  of  the  subject  is  in  no  sense  technical 
nor  theoretical  but  is  simply  a  few  discussions  of 
practical  questions  w4iich  are  apt  to  arise  in  the 
mortgage  loan  business  and  is  written  by  one  whose 
experience  in  such  matter  has  extended  over  many 
years  and  into  many  different  sections  of  the  country. 

The  book  contains  a  number  of  valuable  tables  and 
sketches,  some  of  which  are  difficult  or  impossible  to 
find  elsewhere  and  which  add  much  to  its  practical 
value. 


386460 


The  illustration  shown  on  the  opposite  page  together 
with  its  translation,  for  which  I  am  indebted  to  the 
kindness  of  S.  W.  Strauss  &  Company,  represents  a 
clay  tablet  which  is  said  to  be  the  oldest  record  now 
in  existence  of  a  mortgage  security  although  such 
mortgages  are  said  to  have  been  used  among  the  Baby- 
lonians for  many  years  prior  to  the  date  of  this  one. 


MORTGAGE  LOAN  VALUES 
I 

THE  DESIRABILITY   OF   REAL   ESTATE   SECURITIES 

During  what  are  known  as  "good  times,"  when 
everything  seems  to  be  working  together  for  pros- 
perity, Capital  is  inclined  to  encourage  the  launching 
of  new,  and  the  enlarging  of  old  enterprises. 

The  wheels  of  manufacture  grow  busy,  the  paths  of 
commerce  become  crowded,  and  Capital,  being  ven- 
turesome when  anticipating  large  profits,  is  apt  to 
overestimate  the  value  of  the  securities  offered  and 
to  proceed  along  lines  which  at  other  times  might  be 
considered  hazardous. 

Lender  such  conditions,  mining,  manufacturing, 
transportation,  banking  and  mercantile  enterprises  all 
apparently  flourish,  and  the  securities  which  tliey 
offer  often  sell  readily  upon  the  market  even  when 
a  careful  analysis  would  fail  to  demonstrate  their 
stability. 

Capital,  however,  although  sometimes  inclined  to 
be  greedy,  is  also  easily  alarmed,  and,  when  losses 
occur,  as  they  are  apt  to  do  under  very  liberal  credit 
conditions,  it  at  once  develops  greater  caution,  it 
depreciates  its  own  former  valuations  and  demands  a 
larger  margin  of  security.  Its  confidence  is  so  easily 
disturbed  that  if  many  losses  occur  it  soon  becomes 

9 


10  MORTGAGE  LOAN  VALUES 

inclined  to  donl)!  all  securitios  and  even  to  withhold 
its  support  from  undertakings  Avhich  really  give  good 
promise  of  success,  and  which,  if  properly  financed, 
might  prove  to  be  very  profitable.  These  conditions 
are  frequently  spoken  of  as  "hard  times,"  and  at  such 
times  new  enterprises  are  often  unable  to  gain  a 
foothold,  while  old  ones  halt  along  the  road  and  some- 
times fall  by  the  wayside.  Thus  the  financial  credit 
pendulum  swings  a  little  too  far  on  either  side  of  the 
perpendicular  of  sound  business  sense,  which  indeed 
it  is  compelled  to  do,  for  its  use  and  safety  depend  to 
a  great  extent  upon  its  compliance  with  the  spirit  of 
the  times. 

A  condition  of  financial  uncertainty  and  depression 
naturally  brings  about  a  period  of  liquidation  and  a 
readjustment  of  values,  and  causes  inquiry  to  turn  to 
the  least  easily  affected  securities.  It  is  at  such  times 
that  we  most  often  hear  it  said  that  Real  Estate  Mort- 
gages afford  the  best  security  obtainable,  for  nothing 
else  seems  to  stand  upon  so  solid  a  foundation,  inas- 
much as  Real  Estate  is  less  sensitive,  except  in  special 
instances,  to  adverse  financial  conditions  than  are  the 
stocks,  bonds,  and  other  securities  which  command  as 
good  a  rate  of  interest. 

Although  such  a  conclusion  may  not  be  true  in  each 
individual  instance,  in  a  general  way  it  is  true,  and 
is  a  view  of  the  matter  which  appeals  very  strongly 
to  those  who  have  charge  of  trust  funds,  whether  of 
the  many  millions  held  by  the  great  Insurance  and 
Trust  Companies,  or  the  few  hundreds  guarded  by 
the  individual  for  the  future  use  of  his  family  or  for 
his  own  old  age,  for  upon  such  persons  rests  not  only 


MORTGAGE  LOAN  VALUES  11 

the  principal  obligation  of  safe  investment,  but  also 
the  necessity  for  such  investments  as  will  return  a 
fair  rate  of  interest,  and  which,  once  placed,  may 
remain  undisturbed  for  a  reasonably  long  time. 

The  practice  of  pledging  property  to  secure  the 
payment  of  debts  is  ancient  and  universal,  and  by 
virtue  of  law  and  custom  it  extends,  at  least  indirectly, 
to  almost  all  credit  transactions. 

If  the  person  borrowing  money  or  otherwise  con- 
tracting a  debt  is  possessed  of  a  sufficient  amount  of 
property,  the  debt,  in  the  ordinary  course  of  business, 
is  considered  to  be  well  enough  secured,  even  if  there 
is  no  definite  pledge  of  specified  property,  provided, 
of  course,  that  its  payment  may  be  called  for  within 
a  limited  time,  but,  when  the  maturity  of  the  debt  is 
postponed  for  a  considerable  length  of  time,  such  for 
instance  as  for  a  term  of  years,  the  simple  fact  that 
the  present  property  holdings  of  the  debtor  or  his 
indorsers  are  sufficient,  adds  but  little  strength  to  the 
security,  especially  if  their  holdings  are  of  such  a 
character  that  they  can  be  easily  or  quickly  dissipated 
or  transferred  to  others  without  the  consent  of  the 
creditor. 

The  direct  Real  Estate  mortgage  overcomes  this 
objection,  and  the  use  of  this  form  of  security  is  also 
an  ancient  one.  (More  than  a  thousand  years  ago 
Sighelm,  an  Anglo-Saxon  warrior,  pledged  his  lands 
at  Cooling  to  Goda  to  secure  the  payment  of  thirty 
pounds  which  he  had  borrowed,  and  his  daughter, 
who  inherited  the  lands,  had  to  repay  the  loan  in 
order  to  ' '  cleanse ' '  them  of  the  debt,  although  she  was 
then  the  Queen  of  England.)      It  is  true  that  Real 


12  MORTGAGE  LOAN  VALUES 

Estate  value  often  enters,  either  directly  or  indirectly, 
into  the  secnrity  offered  by  stocks,  bonds  and  munici- 
pal securities,  and  that  it  sometimes  constitutes  a  large 
part  of  such  security,  but  in  this  form  it  is  too  far 
removed  from  any  control  by  tlu^  investor  to  l)e  prop- 
erly classed  as  Real  Estate  security,  and  it  is  not  often 
held  in  as  high  esteem  by  those  whose  main  object  is 
the  safety  of  their  investments  as  is  the  direct  Real 
Estate  mortgage,  which,  while  not  so  liquid  in  its 
character,  nevertheless  affords  a  right  of  recovery 
from  property  that,  to  them  at  least,  is  of  a  more 
tangible  form  and  value. 

There  is,  however,  a  necessary  slowness  about  all 
Real  Estate  transactions  which  must  be  taken  into 
account.  Almost  all  agreements  concerning  it  must 
be  in  writing  and  many  of  these  are  required  to  be 
made  matters  of  public  record ;  if  it  is  taken  as 
security,  a  careful  and  unhurried  examination  of  the 
physical  features  and  of  the  title  to  the  property  is 
also  necessary,  for  no  general  investigation  can  be  de- 
pended upon  to  determine  the  value  and  ownership 
of  any  individual  holding  as  may  be  done  in  the  case 
of  stocks  or  bonds,  nor  can  any  specific  investigation 
for  one  transaction  in  Real  Estate  be  made  to  cover 
fully  the  requirements  for  subsequent  transactions; 
and  if  the  payment  of  a  debt  secured  by  mortgage  is 
defaulted,  foreclosure  and  recovery  is  in  many  States 
rather  a  slow  process,  and  if  it  is  bidden  in  l)y  the 
mortgagee  still  further  delay  is  apt  to  accompany  the 
conversion  of  the  propertj^  into  cash. 

For  these  reasons  Real  Estate  securities  while 
among  the  safest  to  be  had  are  not  so  satisfactorv  to 


MORTGAGE  LOAN  VALUES  13 

those  investors  whose  needs  may  at  any  time  require  a 
quick  realization  upon  their  assets. 

Such  things,  however,  do  not  necessarily  affect  the 
soundness  of  mortgage  securities;  on  the  other  hand, 
they  supply  reasons  for  a  somewhat  higher  rate  of 
interest,  accompanied  by  a  maximum  of  safety,  being 
obtainable,  and  in  contrasting  them  with  the  more 
liquid  securities,  the  rule  does  not  apply  that  a  higher 
rate  of  interest  inversely  indicates  the  value  of  the 
security,  although  in  its  other  applications,  that  is,  in 
comparing  the  individual  securities  of  either  class 
with  others  of  the  same  class,  the  rule  is  undoubtedly 
a  sound  one. 


II 


THE  MORTGAGE  LOAN  BUSINESS 

Taking  the  country  as  a  whole,  the  mortgage  loan 
business  is  one  of  vast  proportions  and  importance; 
it  has  followed  wherever  Real  Estate  has  gained  a 
market  value,  and  its  importance  has  gone  beyond  the 
benefits  accruing  to  those  immediately  concerned  and 
far  into  the  field  of  general  business  and  general  de- 
velopment. The  great  bulk  of  the  money  so  invested 
is  made  up  of  trust  funds  which  are  composed  princi- 
pally of  the  savings  of  a  vast  number  of  persons  of 
limited  individual  earning  capacities,  and  these  funds 
are  entrusted  to  the  care  of  the  many  Insurance  Com- 
panies, Trust  Companies  and  Savings  Banks. 

Under  this  plan,  not  only  is  no  account  too  small  to 
yield  its  proportionate  earnings  to  its  owner  but,  as 
the  company  or  bank  to  which  the  money  is  intrusted 
usually  makes  either  large  loans  or  a  large  number  of 
loans,  it  is  in  a  better  position  to  give  borrowers  at- 
tractive rates  and  terms  than  is  the  small  investor, 
principally  because  its  overhead  charges  upon  a  per- 
centage basis  are  proportionately  smaller. 

If  it  makes  a  large  number  of  loans  it  is  also  en- 
abled to  grant  more  liberal  prepayment  privileges  to 
borrowers  and  yet  suffer  less  proportionate  loss  of 
interest  by  reason  of  loan  funds  lying  idle  than  would 
probably  be  suffered  if  the  investments  were  few  in 

14 


MORTGAGE  LOAN  VALUES  15 

number,  and  with  this  advantage  it  is  able  to  attract 
the  better  class  of  borrowers  whose  securities  entitle 
them  to  the  best  terms  which  the  market  allows. 

If  the  business  is  in  any  sense  an  extensive  one, 
however,  either  in  the  amount  loaned  or  the  number 
of  loans  made  or  in  the  territory  covered,  its  success 
absolutely  depends  upon  its  being  conducted  along 
very  conservative  lines.  On  the  other  hand,  the  in- 
vestor who  makes  only  a  limited  number  of  loans  and 
makes  these  in  a  territory  with  which  he  is  familiar, 
to  persons  whom  he  knows  personally,  and  upon  prop- 
erty with  the  value  and  merits  of  which  he  is  Avell 
acquainted,  will  frequently  accept  securities  which 
M'ould  not  pass  the  scrutiny  of  any  expert  in  this  line, 
and,  although  he  may  even  ignore  important  rules  of 
procedure  in  making  them,  he  is  usually  able  to  avoid 
any  ultimate  loss.  Being  upon  the  ground  he  is  able 
to  keep  in  close  jDersonal  touch  with  his  investments 
and  protect  them  if  necessary;  he  is  therefore  in  less 
proportional  danger  of  suffering  loss  than  he  could 
possibly  be  in  his  average  investment  if  his  operations 
were  extensive,  or  if,  for  any  other  reason,  the  inti- 
mate personal  conditions  did  not  exist. 

It  is  not  the  purpose  of  these  comments,  however, 
to  point  out  how  far,  or  upon  what  occasions,  it  may 
be  safe  to  vary  from  the  beaten  lines  followed  by  the 
more  careful  class  of  lenders,  but  rather,  simply  to  call 
attention  to  the  main  principles  underlying  mortgage 
loan  values,  and  to  some  of  the  conditions  affecting 
those  values  which  are  most  apt  to  be  encountered  in 
the  ordinary  course  of  a  mortgage  loan  business. 

If  it  is  desired  that  a  high  degree  of  safety  shall 


16  MORTGxiGE  LOAN  VALUES 

be  combined  with  reasonable  earnings,  it  is  important 
that  the  rules  affecting  such  securities  should  be 
clearly  understood  and  intelligently  applied. 

To  do  this  successfully  requires  a  good  working 
knowledge  of  the  whole  subject,  unless  indeed  the 
transactions  are  confined  within  very  narrow  limits, 
for,  while  a  number  of  mortgage  loan  rules  are  general 
in  their  character  and  apply  to  all  such  loans,  the  im- 
portance and  applicability  of  other  rules  vary  as  the 
general  class  of  property  or  the  surrounding  circum- 
stances may  differ. 

While  no  theoretical  knowledge  of  this  suliject  can 
be  said  to  be  dependable,  except  as  interpreted  by  the 
light  of  a  practical  knowledge,  it  is  believed  that  such 
a  discussion  may  be  interesting  and  possibly  of  use, 
not  only  to  those  who  are  engaged  in  lending  upon  or 
investing  in  Real  Estate  securities  and  to  whom  these 
comments  are  especially  addressed,  but  also  to  those 
whose  interest  in  the  matter  is  a  less  direct  one. 

In  this  discussion  many  very  simple  and  apparently 
obvious  matters  will  be  mentioned,  the  apology  being 
that  just  such  simple  and  obvious  matters  are  often 
overlooked  by  those  whose  training  in  the  business 
has  not  been  such  as  to  compel  their  consideration  of 
each  and  every  fact  affecting  the  questions  at  issue. 

It  may  also  be  mentioned  that,  notwithstanding  any 
rules  which  may  be  cited,  in  no  part  of  the  mortgage 
loan  business  is  the  personal  equation  of  minor  im- 
portance, and  practical  "common  sense"  must  inter- 
pret every  rule  in  its  application  to  any  question  to 
be  decided,  nor  are  these  comments  to  be  regarded  as 
being  in  the  nature  of  a  text  book  on  mortgage  loans 


MORTGAGE  LOAN  VALUES  17 

but  rather  merely  as  a  series  of  suggestions  upon 
various  features  of  the  subject  and  warnings  of  cer- 
tain dangers  which  may  be  encountered. 

In  order  that  there  may  be  no  misunderstanding  nor 
confusion  of  the  terms  used  herein  it  may  be  said  that 
the  term  "investor"  has  been  chiefly  used  to  designate 
the  person  or  company  who  procures  securities 
from  whatever  source,  purely  for  investment,  and 
that  the  term  "lender"  has  been  used  to  designate  the 
person  or  company  always  dealing  directly  with  the 
borrower,  and  generally  with  the  object  of  selling  the 
loans  to  the  investor. 

Certain  erroneous  ideas  of  loan  values  are  held  by 
many  persons,  and  if  any  such  are  entertained  by  the 
prospective  investor  or  lender  it  is  quite  important 
that  he  should  disabuse  his  mind  of  them  before  he 
undertakes  to  deal  in  such  securities. 

Some  of  these  ideas  seem  absurd  to  those  who  have  a 
knowledge  of  the  subject,  but  to  the  uninformed  their 
absurdity  is  not  always  apparent;  for  instance,  it  is 
supposed  by  some  persons  that  a  Real  Estate  mort- 
gage is  per  se  a  good  investment;  this  is  not  true, 
however,  for  the  property  value  may  be  inadequate  or 
unstable,  the  title  may  be  defective,  the  net  income 
may  be  insufficient,  the  personal  hazard  may  be  un- 
satisfactory, the  time  of  maturity  may  be  too  long 
deferred  or  of  too  short  duration,  the  location  may 
be  too  remote  from  markets  or  other  conveniences,  or 
it  may  have  any  one  or  more  of  many  other  defects. 

It  is  thought  by  some  that  an  expert  can  determine 
the  exact  value  of  real  property,  but  this  cannot  be 
done  because  of  the  fact  that  too  much  of  the  unknown 


18  MORTGAGE  LOAN  VALUES 

enters  into  each  proposition  to  enable  any  expert  to 
"split  dollars"  in  his  valuations,  and  he  can  only  give 
approximate  estimates. 

It  is  also  believed  that  because  the  interest  of  the 
borrower  and  the  lender  differ,  they  are  antagonistic 
— that  the  average  borrower  is  the  unfortunate  victim 
of  circumstances  and  the  average  lender  ever  watchful 
of  opportunities  to  oppress  and  overcharge  him. 
Nothing  could  be  further  from  the  facts,  for  almost 
every  borrower  has  or  believes  he  has  a  more  profit- 
able use  for  the  money  than  its  rental  cost  to  him,  and 
almost  every  lender  is  willing  to  grant  as  easy  and 
favorable  terms  as  are  consistent  with  the  proper  pro- 
tection of  his  legitimate  interests. 

Nor  is  the  belief  uncommon  that  a  greater  volume  of 
business  may  be  obtained  by  the  lender  in  hard  times 
than  in  good  times;  l)ut  this  is  not  the  fact  for  iu 
hard  times  the  people  are  more  economical  in  their 
expenditures  and  more  conservative  in  their  invest- 
ments and  there  are  fewer  apparently  profitable  uses 
for  money,  but  it  may  be  remarked  in  passing  that  in 
hard  times  the  lender's  interests  are  more  often  safe- 
guarded by  the  fact  that  there  is  then  less  danger 
from  high  property  valuations  or  the  unwise  use  by 
the  borrower  of  the  proceeds  of  the  loan. 

Another  mistake  which  the  investor  should  avoid 
is  the  provincial  error  of  supposing  conditions  to  l)e 
necessarily  inferior  ones  because  they  differ  from 
those  that  are  found  in  the  territory  with  wliich  he 
is  familiar.  It  is  sometimes  hard,  for  instance,  for 
the  person  whose  knowledge  is  confined  to  the  wheat 
belt  to  realize  that  just  as  dependal^le  values  may 


MORTGAGE  LOAN  VALUES  19 

exist  in  the  cotton  belt  and  vice  versa,  or  for  one  who 
has  always  lived  in  a  section  where  there  is  a  satisfac- 
tory rainfall  to  believe  that  irrigation  has  passed 
beyond  the  experimental  stage. 

Yet  another  common  error  is  the  belief  that  there 
are  large  sections  where  all  of  the  land  is  practically 
"worn  out,"  and  he  who  lives  in  the  newer  parts  of 
the  North  or  West  often  so  regards  the  older  lands  of 
the  South  and  East.  He  looks  askance  even  at  the 
' '  red  pebble ' '  lands  of  Georgia,  and  regards  nearly  all 
of  the  balance  as  being  practically  worthless,  although 
with  proper  care  and  management  many  parts  of  it 
may  be  made  to  produce  as  much  net  revenue  as  may 
the  black  loam  of  Iowa  or  the  "black  waxy"  lands  of 
Texas. 


THE    COTTON    COUNTRY 


20 


Ill 

BASIS  OF  MORTGAGE  LOAN  VALUES 

Although  subject  to  some  exceptions,  wliieli  will 
be  referred  to  later,  it  is  a  general  rule  that  loan  val- 
ues, (aside  from  questions  of  title  and  personal  haz- 
ard) are  based  upon  market  and  income  values,  and 
that  these  are  based  upon  certain  facts  of  which  it  is 
important  that  the  investor  or  lender  should  have  a 
general  idea  in  order  that  he  may  have  a  clearer 
understanding  of  the  main  causes  which  promote  the 
growth  of  such  values  or  which,  on  the  other  hand, 
may  tend  to  diminish  or  destroy  them,  for  the  only 
safe  w'ay  of  determining  the  soundness  of  any  proposi- 
tion is  by  examining  the  foundation  upon  which  it 
rests. 

Briefly  stated,  the  physical  foundation  of  mortgage 
loan  values  is  made  up  of  the  two  principal  factors  of 
population  and  fertility  of  soil,  united  by  the  third 
factor  of  transportation. 

The  first  two  are  essentially  the  basis  of  all  values, 
for  population  cannot  exist  witliout  fertility  of  soil, 
nor  can  any  value  attach  to  fertility  of  soil  without 
population,  but  in  order  that  such  values  may  main- 
tain any  degree  of  stability  these  two  principal  factors 
must  be  fairly  well  l)alanced ;  that  is,  both  must  exist 
where  each  is  available  to  the  other  at  a  cost  which 
is  not  too  burdensome,  and  here  the  factor  of  trans- 
portation enters  and  furnishes  the  means  to  that  end. 

21 


22  MORTGAGE  LOAN  VALUES 

Nor  is  this  factor  of  less  importance,  so  far  as  ex- 
change or  loan  values  are  concerned,  than  are  the 
others,  for  it  is  also  an  essential  factor  in  the  estab- 
lishment and  maintenance  of  such  values. 

Neither  is  the  term  ' '  transportation  facilities ' '  as 
used  in  this  discussion  intended  to  be  confined  to  the 
ordinary  means  of  moving  products  by  railway  or 
boat  lines,  but  is  intended  to  extend  to  country  roads 
and  city  streets  and  all  of  the  various  public  facilities 
which  may  exist  for  the  transportation  of  persons  or 
commodities  and  the  lack  of  which  causes  otherwise 
desirable  city  and  suburban  locations  and  fertile  lands 
to  remain  unimproved  and  unproductive. 

Notwithstanding  the  fact  that  a  section  of  country 
is  new  and  undeveloped  and  its  population  sparse,  if 
it  is  not  barren  its  land  may  be  said  to  have  an  income 
value,  inasmuch  as  its  products  furnish  food  and  cloth- 
ing and  shelter  for  its  inhabitants ;  such  supplies  may 
be  poorer  and  coarser  in  quality,  and  more  meager  in 
quantity  and  variety  than  they  may  afterwards 
become  under  more  populous  and  advanced  conditions, 
but,  as  they  supply  the  needs  of  the  inhabitants  and 
require  a  certain  amount  of  manual  labor  to  secure 
them,  the  facts  are  much  the  same  in  either  case,  the 
difference  being  more  one  of  degree  than  of  kind. 

Such  an  income  value  as  this  does  not  necessarily 
carry  with  it  at  first  any  rental  or  sale  value  which 
the  possessor  of  the  land  might  obtain  by  transfer- 
ring its  uses  and  profits  to  another,  for  under  the  con- 
ditions of  a  sparse  population  and  abundant  land, 
each  may  easily  obtain  for  himself  at  either  no  cost  or 
at  a  trifling  one,  such  land  as  he  may  be  able  to  use. 


MORTGAGE  LOAN  VALUES  23 

The  development  and  appreciation  in  value  of  agri- 
cultural lands,  and  the  growth  of  villages  into  towns, 
or  of  to\^^ls  into  cities,  are  due  to  many  causes  of 
which  the  increase  in  the  local  population  is  the  pri- 
mary one. 

As  the  population  increases  conditions  change;  the 
natural  resources  of  the  section  become  better  de- 
veloped, the  lands  most  suitable  for  agricultural  pur- 
poses are  taken  up  and  divided  under  separate  owner- 
ships, roads  are  opened,  and  lines  of  communication 
and  traffic  with  other  sections  are  established,  and, 
when  persons  come  into  that  locality  who  wish  to  use 
or  own  lands  that  are  held  by  others.  Real  Estate 
shows  the  beginning  of  a  rental  and  a  sale  value. 

As  this  development  progresses  and  the  population 
still  further  increases,  churches,  schools,  and  centers 
for  trade  and  government  are  established,  all  of  whit-h 
encourage  still  further  growth,  and  the  former  uncei-- 
tain  salability  of  Real  Estate  becomes  more  certain 
and  crystallizes  into  market  value. 

With  a  few  exceptions  (notably  that  of  Gary,  In- 
diana) towns  and  cities  have  had  small  beginnings,  but 
the  sites  originally  selected  for  their  location  were 
usually  so  chosen  for  one  or  more  of  the  various 
causes  which  go  to  promote  urban  growth,  and,  in 
some  instances,  these  have  really  proved  to  be  suffi- 
cient to  that  end,  although  in  most  cases  they  have 
been  found  to  be  wholly  inadequate  in  themselves  to 
any  very  large  groAvth  either  in  population  or  indus- 
tries. 

Under  the  primitive  conditions  of  an  early  civiliza- 
tion,   situations    adjacent    to    hunting    grounds    and 


24  MORTGAGE  LOAN  VALUES 

places  wliicli  afforded  a  g-ood  supply  of  wator,  timber, 
or  pasturage  were  often  favored,  and  under  conditions 
where  local  warfare,  robber  bands,  or  liostile  savages 
were  a  constant  threat  to  the  inhabitants,  locations 
suitable  to  defense  were  chosen ;  the  origin  of  many 
important  cities  may  be  traced  to  these  primitive 
causes. 

In  later  times,  portages,  the  crossings  of  established 
lines  of  travel,  water  power  for  milling  or  manufactur- 
ing purposes,  proximity  to  valuable  mineral  deposits 
or  to  large  bodies  of  timber,  convenient  seats  for  local 
government,  or  centers  for  local  trade,  have  all  been 
common  causes  for  the  location  of  towns,  some  of 
which  have  afterward  acquired  considerable  import- 
ance, although  in  a  majority  of  instances  tliey  have 
shown  very  marked  limitations. 

While  this  has  been  generally  true,  other  and  at 
first  unforeseen  conditions  have  sometimes  developed 
and  have  been  so  favorable  to  urban  growth  that  the 
original  village  has  afterward  attained  considerable 
importance  as  a  town  or  city.  It  is  said,  for  instance, 
that  the  two  most  potent  reasons  for  the  selection  of 
the  site  of  the  present  Capital  of  Indiana  were  the 
possibilities  of  a  steamboat  landing  on  White  River 
and  the  water  power  afforded  by  Fall  Creek  neither 
of  which  afterwards  proved  to  be  of  any  practical 
value. 

When  a  certain  stage  of  development  has  been 
reached,  mortgage  loan  values  come  into  existence  and 
they  will  always  be  found  to  have  developed  in  accord- 
ance with  the  character  and  stability  of  the  foundation 
upon  which  the  market  values  have  been  built.     If 


MORTGAGE  LOAN  VALUES  25 

these  values  have  been  based  upon  well  balanced  con- 
ditions the  loan  values  are  almost  sure  to  be  satisfac- 
tory; if  upon  unsupported  promises  of  future  devel- 
opment or  illy  balanced  conditions,  they  are  in  the  ag- 
gregate as  certain  to  be  unsatisfactory. 

When  a  town  is  established,  and  the  land  which  is 
used  for  that  purpose  is  divided  into  lots,  some  or  all 
of  which  are  sold  to  separate  owners,  any  loan  value 
which  the  land  may  previously  have  had  as  agricul- 
tural land  is  at  once  almost  or  quite  destroyed,  and 
any  loan  value  which  may  afterward  attach  to  it  must 
be  calculated  upon  a  different  set  of  facts,  for  the 
more  direct  and  active  factor  in  its  basis  of  value  will 
then  be  its  population  and  its  suitability  to  the  needs 
of  that  population  instead  of  the  fertility  of  its  soil, 
as  was  the  case  when  it  was  agricultural  land. 

In  the  case  of  the  larger  towns  and  cities  it  is  also 
almost  invariably  true  that  although  as  a  whole  they 
may  have  the  elements  of  growth,  and  even  of  large 
growth,  certain  portions  of  them  will  lack  attractive- 
ness. Sometimes  this  is  for  no  very  obvious  reason 
although  true  to  a  degree  which  depresses  the  Real 
Estate  market  of  that  section,  and  it  is  also  frequently 
true  that  when  Real  Estate  promotions  are  under- 
taken, towns  or  portions  of  towns  are  built  up  and 
improved  bej^ond  what  is  warranted  by  any  support 
which  they  can  safely  hope  to  command. 

These  facts  should  be  kept  in  mind,  for,  although  a 
certain  degree  of  development  is  always  necessary 
before  any  loan  values  can  be  said  to  be  established,  if 
such  development  or  growth  is  one  of  the  past  but  is 
one  which  has  become  stagnated,  or  if,  on  the  other 


26  MORTGAGE  LOAN  VALUES 

hand,  it  is  a  recent  one  but  has  passed  beyond  that 
stage  which  is  justified  by  the  conditions  upon,  which 
a  stable  market  value  can  be  based,  the  loan  value  in 
either  case  is  always  weakened  and,  in  some  instances, 
it  may  even  be  destroyed. 


IV 

CLASSIFICATION  OP  REAL  ESTATE  SECURITIES 

Preliminary  to  an  intelligent  discussion  of  the  sub- 
ject it  is  important  first  to  recognize  the  fact  that 
mortgage  investments  are  naturally  separated  into  two 
general  classes  which  are  knowTi  to  those  who  are 
engaged  in  the  business  as  "farm"  loans  and  "city" 
loans. 

These  two  classes  of  Real  Estate  securities  differ 
from  one  another  in  many  important  respects  and, 
while  many  of  the  rules  of  the  loan  business  apply 
equally  to  either  class,  the  differences  are  so  man}' 
and  so  marked  as  to  fully  justify  their  separate 
classification. 

These  differences  arc  due  to  the  fact  that  althougli 
all  Real  Estate  loan  values  are  based  upon  tlie  dual 
foundation  of  population  and  fertility  of  soil,  the 
more  direct  and  immediate  cause  of  the  inception  and 
growth  of  city  loan  values  lies  in  population,  and  that 
of  farm  loan  values  in  the  fertility  and  products  of 
the  soil. 

In  the  actual  work  of  making  loans  it  becomes  ap- 
parent at  the  very  outset  that  this  difference  is  not 
a  superficial  one ;  in  one  case  the  borrower  must  sho^v 
a  set  of  facts  in  his  application  different  from  those 
which  are  required  to  be  shown  in  the  other;  and 
throughout  all  subsequent  transactions  both  in  the 

27 


28  MORTGAGE  LOAN  VALUES 

making  and  during  tlie  life  of  the  loan,  certain  dif- 
ferences mnst  be  understood  and  taken  into  account. 

There  is  also  a  large  amount  of  Real  Estate  which 
does  not  rightly  belong  in  either  of  the  above  classes 
and  will  not  be  discussed  here  for  the  reason  that  it  has 
no  definite  loan  value  except,  indeed,  a  very  limited 
local  one.  Such  property  consists  of  the  various  kinds 
of  improved  and  unimproved  Real  Estate  located  in 
the  country  or  in  small  tow^ns  and  villages  or  upon 
the  outskirts  of  larger  towns,  where  there  is  an  insuf- 
ficient acreage  to  give  it  any  farm  loan  value  and 
insufficient  urban  development  to  give  it  any  city  loan 
value. 

This  list  also  includes  arid  lands  and  swamp  lands 
and  all  oil,  mineral,  timber  and  range  lands,  when 
the  soil  and  surface  are  unfit  for  farming  purposes, 
or  when  they  cannot  be  agriculturally  developed 
except  at  a  considerable  cost,  none  of  which  is 
regarded  as  acceptable  security. 

There  is  no  possible  question,  however,  but  that 
very  high  grade  and  satisfactory  loans  may  be  ob- 
tained from  either  of  the  main  classes  of  Real  Estate 
securities,  but  the  fact  must  also  be  recognized  that 
the  terms  "farm"  loans  and  "city"  loans  are  each 
subject  to  either  a  liberal  or  a  conservative  interpreta- 
tion. 

Thus  the  more  conservative  lenders  and  investors 
confine  the  meaning  of  the  term  "farm"  loans  to 
loans  upon  agriculturally  improved  lands  and  that  of 
"city"  loans  to  loans  upon  standard  income  property 
well  Avithin  the  limits  of  cities  or  fair  sized  towns; 
while  those  who  are  more  liberal  in  their  views  ex- 


MORTGAGE  LOAN  VALUES  29 

tend  tlie  nieaiiiiiji'  of  hotli  tonus  to  include  less  desir- 
able locations,  <ind  h  ss  fully  developed  properties  and 
also  to  includ;'  many  properties  in  either  class,  the 
uses  of  which  are  confined  to  special  purposes. 

While  an  ai'l)iti-ai'y  line  is  thus  drawn  in  each  g'en- 
eral  class  by  the  conservative  investor  separating  cer- 
tain kinds  of  Real  ]")ro]ierty  as  being  more  desirable 
from  otliei-  kinds  regarded  as  less  desirable,  it  does 
not  follow  that  all  on  one  side  of  that  line  are  good 
nor  that  all  on  the  other  side  are  necessarily  bad ; 
and  it  is  no  doubt  true  that  such  a  rule  excludes  many 
offerings  both  of  farm  and  city  loans  where  the  prop- 
erty has,  not  only  a  present  market  value,  but  where 
it  has  also  a  present  or  potential  income  value  that 
would  seem  to  justify  a  loan  value. 

Such  loans  are  usually  refused  for  the  arbitrary 
reason  that  the  class  to  which  they  belong  is  an  unde- 
sirable one  or  because  it  is  Ix'lieved  that  the  security 
rests  too  much  upon  the  development  or  maintenance 
of  certain  favorable  conditions  not  yet  fully  estab- 
lished, and  that  while  the  security  may  have  both 
the  promise  and  prospect  of  the  needed  support,  there 
is,  nevertheless,  an  element  of  uncertainty  as  to  future 
happenings  and  future  values  which  is  not  attractive 
to  a  conservative  investor. 

The  desirability  of  such  securities  grades  from  the' 
very  highest  down  to  those  offerings  which  are  simply 
impossible,  and  the  line  is  generally  intended  to  be 
drawn  at  a  point  which  will  exclude  the  various  kinds 
of  property  that,  as  a  class,  are  each  liable  to  certain 
loan  faults,  although  it  is  not  usually  intended  that 
the  rule  shall  be  applied  with  such  rigor  as  to  exclude 


30  MORTGAGE  LOAN  VALUES 

the  individual  exception  which  is  not  seriously  af- 
fected by  the  faults  of  its  kind. 

One  example  of  this  may  be  seen  in  the  fact  that 
timber,  orchard,  and  range  lands  are  usually  excluded, 
except  by  local  lenders,  as  belonging  to  an  objection- 
able class,  although  in  the  individual  instance  it  is 
readily  admitted  that  a  certain  amount  of  timber,  or- 
chard, and  permanent  pasture  may  add  to  the  average 
acreage  value  of  a  farm  rather  than  detract  from  it. 
Another  example  may  be  found  in  the  fact  that  a 
city  property  which  is  classed  as  being  a  special  pur- 
pose property,  because  such  is  its  intended  and  pres- 
ent use,  may  have  an  availability  for  other  purposes 
which  will  give  to  that  individual  offering  a  perfectly 
legitimate  loan  value  notwithstanding  the  fact  that 
theoretically  it  belongs  in  an  undesirable  class. 

Various  kinds  of  Real  property,  however,  which 
may  be  fairly  listed  as  "city"  property  or  as  "farm" 
property  are  nevertheless  open  to  objections  when 
viewed  from  a  reasonably  conservative  standpoint; 
this  list  includes  the  cheaper  class  of  city  properties 
which  are  too  liable  to  material  depreciation  and  the 
very  costly  residences  which  wilL  pay  no  adequate 
cash  return  upon  the  investment  and  which  will  sel- 
dom be  found  to  be  marketable  except  at  a  great 
sacrifice. 

It  includes  vacant  lots  and  very  generally  includes 
all  such  "special  purpose"  properties  as  churches, 
schools,  halls,  hospitals,  lodges,  theatres,  hotels,  mills 
and  manufacturing  plants. 

It  includes  those  lands  which  in  their  present  state 
or  location  or  uses  are  only  potentially  farming  lands 


MORTGAGE  LOAN  VALUES  31 

but  which  may  be  reclaimed  in  time  or  developed  at  a 
nominal  cost,  such,  for  instance,  as  those  that  lack  a 
proper  equipment  in  fences  and  buildings,  or  those 
that  are  too  remote  from  markets  to  have  a  satisfactory 
net  income  value  or  are  so  poorly  located  as  to  have 
no  "social"  value,  or  lands  which  are  used  for  such 
special  purposes  as  orchards,  etc.,  or  those  which  have 
too  large  a  proportion  of  "bone"  or  are  either  too  wet 
or  too  dry  for  profitable  farming  but  may  be  easily 
drained  or  irrigated. 

From  a  loan  point  of  view  none  of  the  above  kinds 
of  property  is  very  attractive  and  a  strictly  conserva- 
tive view  excludes  them,  although  a  more  liberal  view- 
finds  occasional  exceptions  in  individual  offerings 
from  among  them. 

It  may  be  the  part  of  wisdom  not  to  attempt  too 
rigid  a  classification  and  to  recognize  exceptions 
when  they  are  well  defined,  considering  each  offering 
upon  its  individual  merits,  but  in  doing  so  there  is 
the  danger  that  a  door  will  be  opened  through  which 
doubtful  loans  may  crowd  unless  it  is  very  wisely 
guarded. 

The  strict  rule  in  this  matter,  ho^^^ever,  is  no  doubt 
the  safe  one,  for  the  temptation  is  always  great  to 
allow  the  action  in  one  case  to  establish  a  precedent 
for  other  cases  where  the  conditions  may  not  be 
exactly  similar,  and  there  is  always  the  chance  that 
outside  interests,  greed  or  optimism  may  incline  the 
investor  to  stretch  a  rule  that  has  come  to  be  regarded 
as  being  an  elastic  one. 

Whatever  practice  is  followed  in  this  matter  it 
should  be  remembered  that  certain  kinds  of  property 


32  ]\IORTGAGE  LOAN  VALUES 

have  not  been  excluded  by  conservative  investors 
except  for  sound  reasons.  It  mnst  also  be  remem- 
bered that  in  going  outside  of  the  regular  lines  man}'' 
unfavorable  facts  may  escape  notice,  and  that  if  the 
kinds  of  property  Avhich  are  not  fully  acceptable 
under  strict  rules  are  arbitrarily  rejected  it  will  at 
least  leave  a  safer  field  for  mortgage  loan  invest- 
ments; and  it  may  be  repeated  here  that  those  legiti- 
mate and  safe  Real  Estate  securities  concerning 
which  there  is  no  element  of  doubt  from  a  physical 
point  of  view,  will  be  found  to  be  principally  confined 
to  two  general  classes,  to-wit,  farm  loans  and  city 
loans,  as  these  designations  are  understood  by  conser- 
vative lenders. 

The  one  class  embraces  only  such  lands  as  are  either 
wholly  or  in  a  large  part  agriculturally  developed  and 
of  a  general  productivity  that  justifies  tlieir  value, 
and  the  other  only  such  well  located  and  substantial 
business  or  residence  properties  as  have  a  satisfa-'tory 
income  value  and  a  satisfactory  "balance"  of  ground 
and  improvement  values. 


UNATTRACTIVE     FARM 


33 


FARM  LOANS  VS.   CITY  LOANS 

It  is  perhaps  an  open  question  as  to  which  general 
class  of  Real  Estate  securities  is  the  more  desirable 
one,  for  each  has  some  advantages  and  some  disad- 
vantages peculiar  to  itself,  and  the  proper  answer  to 
the  question  probably  is  that  it  is  that  class  of  which 
the  investor  has  the  most  intimate  knowledge  and  the 
most  complete  equipment  for  its  investigation. 

The  bad  loan  is  the  individual  loan  of  either  class. 
It  is  the  one  Avhich  has  been  selected  without  due  cau- 
tion or  without  due  knowledge  of  that  ])ranch  of  the 
loan  business  to  which  it  belongs;  but  both  farm  loans 
and  city  loans,  when  they  have  been  properly  selected, 
will  prove  to  be  very  safe  and  satisfactory  either  as 
investments  or  as  salable  securities. 

Lenders,  or  those  who  procure  mortgages  for  the 
market,  very  generally  operate  only  in  the  one  class 
for  which  their  territory  and  their  knowledge  and 
equipment  are  best  fitted,  but  investors  are  very  gen- 
erally ready  and  willing  to  consider  both  farm  loans 
and  city  loans,  provided  that  their  know^ledge  and 
equipment  are  such  that  they  are  able  to  properly 
investigate  and  handle  offerings  from  each  class, 
otherwise  they  usually  confine  their  investments  ex- 
clusively to  one  or  the  other. 

The  city  affords  the  best  field  for  very  large  loans; 
34 


MORTGAGE  LOAN  VALUES  35 

for  instance,  a  city  business  or  office  building  repre- 
senting an  investment  of  hundreds  of  tliousands  of 
dollars  is  not  unnsnal,  and  it  is  a  compact  proposition 
that  can  seldom  be  duplicated  in  salability,  income  or 
ease  of  management  by  any  farm  or  ranch  of  ecjual 
value,  although  in  smaller  loan  propositions,  which, 
of  course,  make  up  the  bulk  of  the  business,  farms 
show  some  points  of  superiority  over  city  properties. 

The  average  city  loan  also  has  certain  advantages, 
one  of  which  is  that  it  can  be  made  more  expeditiously 
and  more  cheapl.y  than  can  the  average  farm  loan,  the 
borrower's  application  is  more  apt  to  be  filled  out  in  a 
satisfactory  manner,  and  when  this  is  not  the  case,  less 
time  is  usually  required  for  its  correction.  It  is  less 
difficult  in  the  case  of  city  loans  to  ol)tain  the  services 
of  disinterested  appraisers  and  of  competent  abstrac- 
tors and  attorneys,  and  less  time  is  consumed  in  per- 
fecting faulty  record  titles  and  in  assembling  the  per- 
sons necessary  to  the  closing  of  loans. 

Nor  are  the  location  and  dimensions  of  city  prop- 
erty often  matters  of  any  uncertainty,  while  it  is 
sometimes  impossible  to  determine  the  lines  or  the 
exact  acreage  of  a  farm  until  a  survey  of  it  has  been 
made ;  nor  is  the  inspection  of  city  property  apt  to  be 
difficult  at  any  time,  while  the  proper  inspection  of  a 
farm  is  often  delayed  by  a  bad  condition  of  the  roads, 
inclement  weather,  a  covering  of  snow  or  a  very  wet 
and  muddy  condition  of  the  land  itself. 

City  property  also  has  the  advantage  of  being  less 
troublesome  for  the  mortgagee  to  keep  in  touch  with 
during  the  life  of  his  loan  and  more  convenient  for 
him  to  handle  in  event  of  a  foreclosure,  its  use  at  a 


36  MORTGAGE  LOAN  VALUES 

cash  rental  will  I)e  considered  liy  a  greater  nmnber  of 
persons,  and  if  offered  for  a  qnick  sale  it  will  usually 
command  the  attention  of  a  larger  number  of  buyers, 
thus  insuring  a  more  ready  sale  and  a  price  which  is 
nearer  its  then  true  value. 

Interest  and  principal  collections  are  not  usually 
more  difficult  in  one  class  than  in  the  other,  but  if 
the  paj-ment  of  the  principal  is  defaulted  and  the 
property  comes  into  the  possession  of  the  mortgagee, 
he  often  finds  himself  unable  to  make  the  farm  yield 
him  any  profit,  for  the  reason,  not  always  recognized, 
that  the  successful  management  of  a  farm  requires 
the  constant  personal  attention  of  a  practical  farmer, 
while  city  property"  may  only  require  the  occasional 
attention  of  an  agent. 

It  is  also  true  that  the  enhancement  of  the  ground 
value,  if  it  should  occur  in  any  section,  is  apt  to  be 
much  greater  in  a  growing  city  where  the  population 
is  considerable  in  proportion  to  the  available  »pace 
in  which  it  can  conveniently  live  and  transact  its  busi- 
ness, and  where  the  land  is  divided  into  comparativelj'" 
small  portions,  than  could  be  the  case  with  any  farm 
properties  under  their  conditions  of  larger  areas  and 
a  sparser  population. 

On  the  other  hand,  properly  made  farm  loans  have 
an  advantage  in  one  feature  that  is  of  paramount 
importance;  they  have  a  certain  stal)ility  of  value  not 
generally  to  be  found  in  city  loans ;  their  actual  value 
rests  upon  a  more  simple  foundation,  and  for  this 
reason  is  not  likely  to  be  seriously  affected  during  the 
ordinary  life  time  of  a  mortgage  loan  by  the  many 
causes  which  affect  city  values. 


MORTGAGE  LOAN  VALUES  37 

From  the  laud  come  the  products  which  are  esseu- 
tial  to  life;  the  towus  and  cities  do  not  produce  them; 
they  help  to  absorb  and  consume  them;  they  collect, 
assort,  exchange  and  distribute  them ;  they  change 
their  form,  combine  them  and  make  artificial  pro- 
ducts from  them,  which,  while  not  essential  to  life,  are 
more  or  less  important  to  civilization;  but  the  land, 
in  the  first  place,  produces  them. 

The  value  of  city  property  therefore  rests  upon 
more  complex  conditions  than  does  that  of  farms,  and 
is  subject  to  more  changes  and  often  to  changes  over 
which  the  owner  has  no  control.  The  city,  as  a  whole, 
may  either  gain  or  lose  in  its  competition  with  other 
cities  and  in  consequence  its  Real  Estate  values  may 
rise  or  fall,  its  limits  may  be  extended  and  new  addi- 
tions laid  out  and  improved  so  as  to  overshadoAV  the 
older  sections,  once  desirable  business  or  residence  dis- 
tricts may  be  shifted  to  other  localities  to  the  detri- 
ment of  the  old,  and  the  value  of  a  certain  piece  of 
property,  which  may  have  been,  in  a  great  measure, 
due  to  the  former  improvement  of  surrounding  or 
nearbj'  properties,  may  suffer  a  depreciation  due 
Avholly  to  their  depreciation,  without  any  changes 
whatever  having  been  made  in  that  particular  prop- 
erty; but  no  similar  facts  apply  to  farms,  for  prac- 
tically all  of  the  land  that  is  suitable  for  agriculture 
has  already  been  taken  up  and  made  into  farms,  each 
of  which  may  be  operated  or  improved  in  value  as  an 
independent  unit  in  itself  with  little  fear  that  it  will 
ever  suffer  from  any  changes  in  its  surroundings. 

The  farm  is  not  so  sensitive  to  many  other  causes 
which  may  bring  unpopularity  and  consequent  loss  of 


386460 


38  MORTGAGE  LOAN  VALUES 

value  to  a  city  locality,  nor  to  the  over-valuation  inci- 
dent to  "booms,"  for  the  measure  of  its  value  depends 
less  upon  an  arbitrary  public  opinion;  its  perishable 
improvements  also  constitute  a  much  smaller  part  of 
the  security  than  they  do  in  the  case  of  city  property, 
and  in  order  to  maintain  their  value  it  is  not  so  neces- 
sary that  they  should  be,  or  be  kept,  "up  to  date;" 
nor  is  the  farm  so  liable  to  excessive  taxation  nor  so 
likely  to  be  charged  with  the  cost  of  public  improve- 
ments that  may  become  a  lien  against  it  prior  to  the 
mortgage,  which  improvements  are  sometimes  of  little 
actual  advantage  to  selling  or  income  values. 

A  remarkable  illustration  of  what  may  unexpectedly 
happen  in  this  way  is  that  of  the  middle  western  city 
which  replaced  its  old  Court  House  with  a  modern 
million  dollar  structure  and  soon  found  that  the  value 
of  the  nearby  business  property  had  depreciated  more 
than  fifty  per  cent.  The  explanation,  however,  was 
simple,  for  the  neighborhood  business  had  been  sup- 
ported by  the  trade  of  the  farmers  with  whom  the  old 
Court  House  had  been  a  popular  meeting  place,  while 
the  new  one  proved  to  be  so  unattractive  to  them  that 
their  trade  soon  drifted  to  other  localities. 

Although  the  present  market  value  of  city  property 
may  be  more  readily  determined,  a  safer  basis  for  esti- 
mating loan  values  is  undoubtedly  true  of  farms,  for 
these  combine  tlie  homes  and  business  of  the  farmers, 
and  while  unfavorable  seasons  or  lower  prices  for 
farm  products  may  temporarily  affect  their  earning 
power,  with  ordinarj^  industry  these  earnings  will 
seldom  fall  below  an  amount  necessary  for  the  support 
of  the  farmer  and  his  family  and  the  payment  of  his 


MORTGAGE  LOAN  VALUES  39 

taxes  and  interest ;  nor  does  the  farm,  even  under 
unfavorable  crop  conditions,  often  fail  to  furnish  some 
part  of  the  supplies  which  are  needed  by  a  constantly 
increasing  city  population,  and  whatever  its  earning 
power  may  be,  to  some  degree  at  least  it  is  a  depend- 
able one,  for  farm  products  must  always  be  in  demand, 
although  the  enforced  idleness  of  hard  times  may 
cause  retrenchments  sufficient  to  greatly  lessen,  if 
they  do  not  temporarily  destroy,  the  income  value  of 
city  property. 

No  valid  objections,  however,  can  be  urged  against 
the  properly  selected  security  afforded  by  either 
farms  or  city  properties,  and,  although  there  are  dif- 
ferences of  opinion  as  to  their  respective  desirability, 
it  may  be  said  that  while  the  city  loan  is  no  doubt  the 
most  convenient  for  the  investor  or  lender  to  handle,  a 
contention  in  favor  of  the  superior  stability  of  farm 
securities  seems  to  be  sustained  by  the  experienae  of 
the  larger  investing  companies  who  have  ajquired 
fewer  farm  than  city  properties  by  foreclosure  of 
mortgages  and  have  suffered  less  ultimate  loss  in  that 
class  of  securities,  notwithstanding  the  fact  that  the 
managers  of  such  companies  have  usually  had  a  less 
intimate  knowledge  of  the  requirements  of  a  farm 
loan  business  than  they  may  easily  have  had  or  have 
acquired  concerning  a  city  loan  business. 


IN   THE   CORN   BELT 


40 


\1 

MORTGAGE  LOAN   T1:RRIT0RY — GENERAL  FEATURES 

The  willingness  or  unwillingness  of  investors  to 
enter  any  particular  loan  field  rests  (except  as  it  may 
be  affected  by  a  local  optimism)  upon  such  conserva- 
tive opinions  as  may  properly  result  from  a  knowl- 
edge of  various  relevant  facts,  few  of  which  are  con- 
clusive in  themselves  but  each  one  of  which  has  its 
proper  place  and  weight  when  taken  in  connection 
with  the  others  in  determining  the  main  question. 

It  naturally  follows,  therefore,  that  different  lend- 
ers and  investors  sometimes  reach  different  conclu- 
sions as  to  the  desirability  of  a  certain  territory,  and 
while  there  is  often  ample  ground  for  such  differences 
of  opinion  even  among  experts,  it  is  also  true  that 
investors  are  generally  too  much  inclined  to  overvalue 
certain  pet  theories  and  either  to  accept  or  to  reject 
any  section  of  territory  upon  insufficient  grounds, 
without  waiting  to  assemble  and  digest  all  of  the  evi- 
dence concerning  its  advantages  or  disadvantages  as  a 
loan  field. 

If  the  investor  is  cautious  he  will  be  little  inclined 
to  lead  the  way  into  untried  territory  but  neither 
should  he  follow  the  lead  of  others  until  he  has  care-, 
fully  examined  the  field  and  convinced  himself  that 
the  facts  fully  justify  their  decisions,  for  they  may 
have  either  approved  or  rejected  it  on  insufficient 

41 


42  MORTGAGE  LOAN  VALUES 


grounds,  and  before  reaching  a  decision  it  is  important 
that  he  should  know  to  what  extent  it  has  been  ap- 
proved by  others,  what  rates  and  terms  they  grant 
therein,  and  whether  or  not  the  favorable  view  will 
release  enough  capital  to  care  for  its  loan  needs  and 
its  probable  loan  defaults.  For  to  say  the  last  word 
first  concerning  the  desirability  of  any  given  territory 
for  mortgage  loan  purposes,  will  be  to  say  that  the 
section  should  contain  in  itself,  or  be  able  to  attract 
from  outside  sources,  sufficient  capital  to  absorb  anj- 
defaulted  loans  which  may  have  been  originally  made 
along  sound  and  conservative  lines,  and  this  financial 
ability,  "whether  it  rests  upon  tlie  use  of  home  funds  or 
of  foreign  capital,  should  be  based  upon  local  condi- 
tions which  are  not  likely  to  lose  their  force  and  effect 
during  the  ordinary  life  of  a  loan. 

Before  investigating  the  special  features  of  any 
given  loan  field  certain  general  facts  should  be  taken 
into  account,  and  it  is  perhaps  best  to  consider  first 
the  State  laws  affecting  mortgage  loans  therein,  for 
the  reason  that  these  laws  affect  all  of  a  large  and 
well  defined  territorj^,  and  if  the  investor  rejects  the 
territory  upon  the  ground  that  the  laws  are  objection- 
able, all  other  questions  as  to  that  particular  State  are 
thereby  disposed  of.  If,  on  the  other  hand,  he  finds 
this  feature  to  be  unobjectionable  and  decides  to  enter 
the  territory,  he  will  already  have  acquired  at  least 
some  small  part  of  the  knowledge  necessary  for  the 
protection  of  his  interests. 

While  the  laws  of  the  various  States  differ  with  re- 
spect to  many  matters  which  are  of  interest  to  invest- 
ors, and  although  such  laws  often  seem,  at  first  sight, 


MORTGAGE  LOAN  VALUES  43 

to  be  unfavorable  to  the  lender,  they  are  seldom  so  ob- 
jectionable as  they  appear  to  be  to  those  who  are  un- 
familiar with  them,  and  the  investor  will  find  that 
loss  or  trouble  may  usually  be  easily  avoided  by  the 
exercise  of  a  proper  degree  of  care. 

These  laws  touch  the  mortgage  loan  business  at 
many,  and  sometimes  at  unexpected  points — some  are 
radical,  while  others  seem  to  be  of  comparatively 
slight  importance,  some  extend  to  the  contractual 
rights  of  the  parties,  and  others  affect  modes  of  pro- 
cedure only,  but  it  is  exceedingly  important  that  all 
such  laws  should  be  fully  understood,  and  that  all 
of  their  requirements  should  be  strictly  complied  with 
if  any  loans  are  made  in  that  territory. 

It  is  a  somewhat  singular  fact  that  investors  gener- 
ally are  also  disposed  to  adopt  State  and  County 
lines  as  defining  the  physical  and  moral  as  well  as 
the  legal  limits  of  satisfactory  or  unsatisfactory  ter- 
ritory, which  rule  does  not  seem  to  follow  a  practical 
view  of  the  situation,  for  although  State  lines  mark 
the  boundaries  wherein  laws  which  may  be  regarded 
as  being  either  favorable  or  unfavorable  to  the  mort- 
gage loan  business  are  operative,  and  County  lines 
mark  tlie  boundaries  wherein  satisfactory  evidence  of 
titles  may  be  easy  or  difficult  to  obtain,  and  County 
as  well  as  City  limits  mark  the  lines  wherein  taxation 
may  be  excessive,  or  law  enforcement  lax,  and  while 
in  such  matters  as  these  the  civil  boundary  becomes  a 
part  of  the  question  at  issue,  it  is  hard  to  understand 
why  any  such  arbitrary  limits  should  be  adopted  in 
other  matters,  as  they  are  more  apt  to  be  misleading 


44  I\IORTGAGE  LOAN  VALUES 

than  helpful  in  determining  the  loan  value  of  the 
territory. 

It  happens  more  often  than  otherwise  that  tlie  terri- 
tory under  consideration,  when  taken  as  a  whole,  pre- 
sents both  attractive  and  unattractive  pliysical  and 
moral  features,  and  the  lines  of  demarcation  between 
those  portions  which  measure  up  to  a  satisfactory 
standard  and  those  which  fail  to  do  so  should  be  made 
along  other  lines  than  those  which  have  been  pre- 
viously established  for  an  entirely  different  purpose, 
— for  instance,  it  may  be  wiser  for  an  investor  in  farm 
loans  to  follow  an  exceptionally  good  section  of  land 
across  a  county  line  rather  than  to  exclude  that  whole 
county  (as  is  the  practice  of  some  investors)  because 
in  some  sections  its  lands  are  of  an  inferior  quality. 

Another  general  feature  which  should  be  consid- 
ered (more  especially  in  the  case  of  farm  territory)  is 
that  of  its  altitude  and  climatic  conditions,  the  annual 
amount  and  distribution  of  rainfall,  the  tendency  to 
extremes  of  moisture  or  drouth,  and  the  ability  of  the 
soil  and  usual  crops  of  the  section  to  resist  the  bad 
effects  of  such  extremes;  and  if  irrigated  territory  is 
considered,  the  sufficiency,  dependability  and  quality 
of  its  water  supply  and  the  legal  status  and  priority 
of  its  water-rights  must  be  carefully  investigated. 

Another  matter  of  importance  is  the  general  useful- 
ness of  the  territory;  that  is  to  say,  a  very  large  pro- 
portion of  it  should  be  productive ;  and  it  is  also  a 
good  feature  for  its  earning  power  to  be  rather  diverse 
than  otherwise,  or  at  least  not  confined  Avithin  too  nar- 
row limits,  for  to  be  a  good  loan  field  it  must  have 
the  ability  upon  occasion  to  care  for  its  own  needs  at 


MORTGAGE  LOAN  VALUES  45 

least  temporarily.  It  should  also  have  various  attrac- 
tions which  will  tend  to  Iciupt  outside  capital;  for 
example,  a  city  which  is  almost  wholly  dependent  upon 
a  single  industry,  or  a  strictly  "one  crop"  farming 
section  cannot  be  said  to  be  so  attractive  from  a  loan 
point  of  view  as  one  which  is  supported  to  the  same 
extent  by  the  income  derived  from  a  variety  of  inter- 
ests or  products,  any  one  of  which  might  fail  without 
seriously  impairing  the  general  prosperity. 

If  it  is  territory  which  is  very  largely  dependent 
upon  a  single  "money  crop"  the  conditions  surround- 
ing this  crop  should  be  studied  and  the  suitability  of 
soil,  climate,  labor  and  other  conditions  for  the  profit- 
able production  of  other  crops,  if  this  one  should  fail 
to  remain  profitable,  should  be  considered. 

It  ma}^  also  be  stated  that  one  of  the  most  tempting 
as  well  as  one  of  the  most  dangerous  sections  in  which 
a  mortgage  loan  business  can  be  undertaken  is  terri- 
tory which  is  experiencing  a  "boom,"  and  that  per- 
haps the  most  difficult  task  in  selecting  a  loan  field  in 
new  or  developing  territory  is  to  distinguish  between 
the  evidences  of  a  permanent  and  those  of  a  temporary 
prosperity. 


46 


VII 

MORTGAGE    LOAN    TERRITORY — SPECIAL    FEATURES 

When  considering  the  various  matters  which  go  to 
make  up  general  conclusions  as  to  the  acceptahility  of 
loan  territory  it  slionld  not  be  expected  that  any  one 
section,  although  satisfactory  as  a  whole,  will  be  found 
to  be  equally  good  in  all  of  its  parts  or  in  all  of  its 
more  desirable  features.  It  sliould,  however,  be 
known  to  be  generally  good,  and  that  its  good  features 
are  based  upon  conditions  that  are  not  likely  to  change 
for  the  worse  or  to  become  relatively  poorer  in  the 
general  march  of  improvement,  and  it  should  also  be 
knQwn  that  a  sufficient  number  of  acceptable  secur- 
ities can  probably  be  obtained  therein  to  justify  the 
investor  in  thoroughly  investigating  it  and  in  keeping 
in  close  touch  with  it  during  the  life  of  his  loans,  and 
experience  will  teach  him  that  he  can  not  do  these 
things  from  railway  trains  nor  by  confining  his 
inquiries  to  those  persons  whose  interests  require  that 
he  should  reach  certain  conclusions,  but  that  he  can 
only  obtain  reliable  information  by  more  painstaking 
and  intelligent  methods. 

Among  the  various  local  conditions  which  should  be 
observed  by  him,  some  will  of  course  show  their  char- 
acter upon  the  surface  while  others  will  require  a 
closer  observation  and  more  careful  inquiries,  but  in 
either  case  he  should  learn  the  facts,  and  it  is  desirable 

47 


48  MORTGAGE  LOAN  VALUES 

that  they  should  show  the  territoiy  to  be  reasonably 
well  populated  and  1o  have  eomparatively  few  idle 
lands  or  vaeant  houses.  Its  labor  conditions  should  be 
fairly  good  and  its  population  in  the  main  both  pros- 
perous and  law-abiding;  the  ownership  of  its  Real 
Estate  should  not  incline  to  single  holdings  of  large 
bloeks  but  should  be  well  distributed,  it  being  a  good 
feature  if  owner  occupants  are  numerous  and  absentee 
landlords  scarce,  and  if  some  portions  of  the  territory 
are  undeveloped,  it  should  be  known  why  this  is  true, 
and  to  what  extent,  if  any,  they  may  be  irreclaimable. 

The  territory  should  be  healthful  and  should  have 
a  good  w^ater  supply  and  good  drainage ;  it  should 
not  be  especialh^  liable  to  any  disaster  (such  as  flood 
damage)  nor  to  any  general  failure  of  income;  and 
all  parts  of  it  should  be  accessible  by  good  streets  or 
roads  and  have  sufficient  other  transportation  facili- 
ties to  maintain  the  proper  balance  between  its  pro- 
duction and  consumption  at  reasonable  cost. 
y  There  is  another  matter  that  enters  into  loan  values, 

although  not  so  often  considered,  which  may  be  called 
the  social  value  of  the  territory.  This  does  not  con- 
template on  the  one  hand  that  it  should  have  excep- 
tionally high  social  advantages,  nor  on  the  other  that 
it  should  barely  avoid  feuds  or  conditions  of  general 
immorality,  but  only  that  its  general  social  tone  should 
be  wdiolesome  and  unobjectionable  to  the  average  per- 
son who  might  not  otherwise  consifler  it  as  a  suitable 
location  for  his  home. 

If  farm  territory  only  is  desired  it  should  have  in 
addition  to  the  advantages  heretofore  enumerated, 
convenient  schools  and  churches,  fairly  good  and  con- 


MORTGAGE  LOAN  VALUES  49 

venient  local  niarkcts  and  sliippiii^-  jioiiits.  and  reason- 
ably good  wagon  roads  ovci-  wlii  -h  its  prodnots  may 
be  transported. 

It  slionld  also  l»e  known  to  what  extent  it  may  eon- 
tain  faults  that  make  the  aetnal  value  less  than  the  ap- 
parent value  and  yet  do  not  appear  plainly  upon  the 
surface  at  all  seasons,  sueh  as  portions  containing  un 
desirable  sub-soils  or  surface  soils  which  for  some 
reason  are  of  inferior  productivity  although  of  the 
same  color  and  general  appearance  as  the  lands  not  so 
affected. 

If  city  loans  only  are  desired,  the  size  and  location 
of  the  city  must  be  considered  and  its  proportionate 
area  and  population ;  the  boundaries,  natural  or  other- 
wise, that  may  limit  or  confine  its  growth  to  certain 
sections ;  its  transportation  facilities,  labor  conditions, 
power  and  fuel  supply  and  such  other  competitive 
advantages  as  it  may  have  over  other  nearby  cities; 
its  financial  condition,  tax  rate,  fire  protection,  and 
public  improvements,  and  the  general  class  and  char- 
acter of  its  population  are  all  matters  which  should 
be  taken  into  account. 

From  a  city  loan  point  of  view  the  importance  of 
well  balanced  conditions  is  greater  than  is  the  mere 
fact  of  a  large  population,  and  the  larger  size  of  a 
city  is  never  conclusive  evidence  of  its  greater  desir 
ability  as  a  loan  field;  on  the  contrary  it  has.  espe- 
ciall}^  if  it  is  a  growing  city,  at  least  one  distinct  disad- 
vantage in  the  greater  liability  to  shifting  values  of  an 
important  character.  It  should,  of  course,  be  large 
enough  to  insure  competition  among  buyers  when 
real  property  is  offered  for  sale  at  a  fair  bargain, 


50  .MOKTGACiE  LOAN  VALUES 

but  Real  Estate  in  a  moderate  sized  town,  one,  for 
instance,  wliieli  is  princi])ally  dependent  iii)()n  its 
agricultural  surroundings,  may  have  as  safe  a  loan 
value  in  such  amounts  as  are  justified  by  its  sur- 
roundings, as  may  a  city  of  several  times  its  size  which 
is  dependent  upon  less  stable  conditions,  except  that 
loan  values  are  perhaps  in  more  danger  in  the  smaller 
cities  because  of  an  extravagance  in  expenditures  for 
development  and  management,  for  this  is  a  relative 
matter  and  in  the  smaller  cities  such  expenses  are  apt 
to  be  greater  in  proportion  to  the  taxable  wealth  than 
they  are  in  the  larger  ones,  and  this  may  add  an 
extra  burden  of  taxation  to  Real  Estate  which,  added 
to  the  cost  of  insurance  and  upkeep,  may  materially 
reduce  its  loan  value  by  reducing  its  net  earning 
power. 

It  will  be  seen  that  the  desirability  of  loan  territory 
depends  upon  many  different  things,  a  number  of 
which  have  been  herein  enumerated,  but  in  consider- 
ing them,  two  facts  must  be  kept  in  mind ;  first,  that 
while  it  is  not  necessary  for  the  territory  to  greatly 
excel  in  any  of  these  matters,  a  marked  deficiently  in 
any  one  of  them  is  apt  to  be  a  serious  objection ;  and 
second,  that  each  feature  should  be  measured  at  its 
true  w^orth  as  modified  by  other  existing  conditions, 
the  danger  being  that  the  investigator  may  allow  his 
interest  in  some  features  to  obscure  the  importance  of 
others,  or  may  cause  him  to  overlook  modifying  con- 
ditions. 

Many  illustrations  in  support  of  this  fact  could  be 
given;  for  example,  the  inspector  may  be  so  greatly 
impressed  by  the  heavy  pay-roll  of  a  town 's  industries 


MORTGAGE  LOAN  VALUES  51 

that  he  will  fail  to  give  proper  weight  to  the  fact  that 
these  industries  are  very  few  in  numl)er  and  may  not 
be  permanent  in  location  or  successful  in  operation; 
or,  when  considering  the  importance  to  all  parts  of  a 
farming  section  of  convenient  shipping  points,  he 
may  lose  sight  of  the  fact  that  some  crops  can  be 
transported  much  more  cheaply  than  others,  roughly 
speaking,  the  product  of  at  least  ten  acres  of  lint  cot- 
ton can  l)e  hauled  on  each  trip  to  market  by  the  same 
team  that  would  only  be  able  to  haul  the  product  of 
one  acre  of  corn,  and  the  money  value  of  the  load  of 
cotton  is  usually  even  more  than  ten  times  that  of 
the  load  of  corn,  and  so  the  more  comprehensive  view 
shows  the  lack  of  numerous  shipping  points  in  one 
instance  to  be  less  objectionable  than  in  the  other. 


VIII 

METHODS  OP  SECURING  MORTGAGE  LOANS 

The  question  of  what  pUin  should  l)o  adopted  in 
order  to  secure  a  satisfactory  line  of  securities  is  on(! 
of  considerable  interest  to  tlie  investoi-,  and  the  answer 
depends  somewhat  upon  the  kind  and  amount  of  loans 
wanted  and  the  territory  from  which  they  are  to  be 
drawn. 

This  matter  is  one  of  especial  interest  to  the  investor 
whose  yearly  investment  fund  is  a  large  one,  and  who 
is  anxious  to  secure  business  but  does  not  care  to  make 
any  very  large  individual  loans ;  if  he  is  very  particu- 
lar as  to  the  character  of  the  securities  which  he  will 
accept  he  soon  finds  that  he  cannot  confine  his  busi- 
ness to  too  limited  an  area,  for  the  sim]ilo  reason  that 
it  will  not  afford  a  sufficient  outlet  for  his  funds ; 
what  outlet  it  does  afford  being  apt  to  be  divided  by 
the  competition  of  other  investors. 

This,  of  course,  is  speaking  of  those  cases  where 
rather  extensive  operations  are  undertaken  in  medium 
sized  loans  and  in  the  ordinary  farm  or  combined  farm 
and  city  loan  business;  because,  if  the  investor  con- 
fines his  business  entirely  to  city  loans  and  operates 
only  in  a  large  city,  and  especially  if  he  considers  very 
large  individual  loans,  he  may  in  such  cases  maintain 
a  close  personal  supervision  over  the  placing  of  large 
sums ;  otherwise  he  will  find  it  necessary  to  go  into 

52 


MORTGAGE  LOAN  VALUES  53 

sections  ^vhicli  are  too  remote  fi-oni  his  home  territory 
for  him  to  give  a  close  personal  attention  to  the  details 
of  the  business. 

The  proper  supervision  of  these  details  is  ((uite  im- 
portant, often  vitally  so,  and  it  can  only  be  accom- 
plished by  the  aid  of  a  rather  comprehensive  knowl- 
edge of  local  matters.  Therefore  the  investor  finds 
that  if  he  would  maintain  such  supervision  when  he 
goes  into  new  fields,  he  must  have  some  sort  of  a 
local  organization  or  connections  therein  upon  wliieli 
he  can  rely ;  that  he  must  have  some  one  on  the  ground 
whom  he  is  willing  to  trust  with  both  preliminary 
and  detail  work,  some  one  who  can  keep  in  touch  with 
the  territory  and  the  loans,  and  Avith  whom  the  bor- 
rowers can  conveniently  deal ;  and  that,  otherwise,  his 
business  in  that  territory  is  apt  to  be  either  very  light 
in  volume,  or  unsatisfactory  in  character,  or  both. 

Although  loans  which  have  been  made  in  territory 
where'  the  investor  has  no  representative  may  seem 
at  first  to  be  very  attractive  ones,  their  isolated  situa- 
tion is  liable  to  be  a  source  of  annoyance  at  least,  if 
not  of  danger,  for  the  investor  cannot  then  pass  intel- 
ligently upon  such  requests  as  are  frequently  made  for 
l^artial  releases,  extensions  of  interest  payments,  priv- 
ileges of  making  changes  in  buildings  or  of  selling 
timber,  etc.,  nor  can  he,  without  a  re-examination  of 
the  property,  pass  intelligently  upon  the  desirability 
of  renewing  the  loan  when  it  becomes  due,  for,  in 
addition  to  other  difficulties,  the  security  may  be 
neglected  or  despoiled  -witli  little  chauv-e  of  his  atten- 
tion being  called  to  that  fact.  As  a  result  the  larger 
investors,   seeking  some  more  efficient  and  less  ob- 


54  i\IORTGAGE  LOAN  VALUES 

jectionable  plan,  either  estal)lish  local  branches  of 
their  main  organizations  or  form  agency  connections 
■with  local  lenders. 

Where  snch  l)ranch  organizations  are  establislicd  it 
is  usnally  for  the  purpose  of  procuring  loans  for 
investment  purposes  only,  and  of  dealing  as  directly 
as  possible  with  the  borrowers.  They  are  usually 
operated  strictly  upon  a  salary  basis,  no  one  connected 
with  them  having  any  interest  in  the  success  or  fail- 
ure of  any  application,  and  they  no  doubt  afford  the 
investor  the  best  possible  control  over  the  details  of 
his  business  and  enable  him  to  require  all  forms  and 
practices  to  conform  to  his  rules. 

This  plan  is  used  with  satisfaction  and  success  by 
some  of  the  more  important  investing  companies,  but 
ordinarily  it  may  be  said  to  be  unsuited  to  the  needs 
of  those  whose  command  of  funds  is  at  times  limited, 
for  it  is  open  to  the  objection  of  not  being  elastic 
enough  to  meet  the  varying  conditions  of  the  business. 
To  be  effective  and  dependable  such  branches  must 
be  under  very  high  class  management  and  completely 
equipped  for  the  work,  and  to  be  economical,  they 
must  not  have  periods  of  inaction  while  their  over- 
head expenses  continue;  and  this  last  requirement  is 
practically  impossible  in  organizations  devoted  ex- 
clusively to  making  such  investments,  for  in  any  ter- 
ritory the  demand  for  loans  differs  greatly  and  often 
unexpectedly  at  different  times,  and  although  such 
organizations  may  at  all  times  be  amply  supplied  with 
investment  funds,  they  cannot  well  avoid  periods  of 
comparative  idleness  when  there  is  a  light  demand. 

It  is  a  very  common  practice,  therefore,  for  inves- 


MORTGAGE  LOAN  VALUES  55 

tors,  instead  of  establishing  branch  organizations,  to 
procure  their  loans  under  some  form  of  contract  from 
a  local  trust  or  loan  company  which  has  been  organ- 
ized, not  only  for  the  purpose  of  making  Real  Estate 
mortgages  in  a  certain  section,  but  also  for  tlie  pur- 
pose of  disposing  of  them  to  investors. 

Such  lending  concerns  operate  in  almost  evei-y  part 
of  the  country  and  are  better  able  to  avoid  the  diffi- 
culties which  attend  branches  organized  for  invest- 
ment purposes  only,  for  they  work  both  the  buying 
and  selling  ends  of  the  business,  and  if  sufficiently 
strong  in  finances  or  credit,  they  can  make  and  carry 
loans  during  periods  when  their  outlet  may  be  tempo- 
rarily dammed  and  the  demand  heavy.  Nor  is  the  oc- 
casional necessity  of  doing  this  apt  to  embarrass  them, 
for  they  seldom  depend  altogether  upon  a  single  out- 
let for  the  sale  of  their  securities,  and  as  they  also 
frequently  engage  in  other  kindred  lines  of  business 
such  as  banking,  trusteeships,  Real  Estate  or  insur- 
ance, these  additional  lines  furnish  partial  employ- 
ment for  their  loan  employees  and  help  to  cover  over- 
head expenses  during  dull  loan  seasons. 

In  most  cases,  this  seems  to  be  the  most  satisfactory 
source  through  which  the  investor  can  get  his  securi- 
ties, and  lending  companies  are  very  generally  anxious 
to  make  loan  connections  with  him  for  under  normal 
conditions  they  are  in  the  position  of  the  dealer  in 
merchandise  who  has  less  trouble  in  o])taining  the 
goods  to  fill  his  shelves  than  he  has  in  finding  enough 
customers  to  make  his  business  profitable. 

On  the  other  hand,  there  are  times  when  the  money 
which  seeks  this  form  of  investment  is  so  abundant, 


.56  IMORTGAGE  LOAN  VALUES 

either  generally  or  in  some  particular  section  of  the 
country,  that  the  local  lenders  are  in  sharp  competi- 
tion for  securities  instead  of  funds,  and  at  such  times, 
lenders  are  less  anxious  for  connections  witli  conserva- 
tive investors. 

This  very  easy  credit  condition  sometimes  has  the 
effect  of  inducing  overvaluations,  etc.,  but  when  it  is 
extreme  it  may  always  be  expected  to  be  temporary, 
for  its  evils  will  in  time  cure  themselves  and  skillful 
and  conservative  lenders  are  usually  able  to  secure  a 
satisfactory  line  of  securities,  if  not  at  once,  at  least 
within  a  reasonable  time. 

When  an  investor  adopts  this  plan  of  procuring 
loans  through  the  agency  of  others,  it  is  of  a  primary 
importance  to  him  that  he  should  make  the  right  con- 
nections, for  many,  even  among  those  who  bear  a  high 
reputation  for  honesty  and  general  business  ability, 
are  unsafe  persons  to  intrust  with  the  making  of  mort- 
gage loans  or  from  whom  to  buy  them. 

It  is  also  really  remarkabh^  what  attractive  looking 
references  and  what  plausible  statements  and  argu- 
ments can  be  presented  by  those  with  whom  no  loan 
connections  should  be  made  and  sometimes  even  by 
those  who  are  thoroughly  unscrupulous,  irresponsible 
and  incompetent. 

It  is  true,  however,  tliat  the  less  skillful  and  less 
conservative  among  them  often  have  the  least  trouble 
in  getting  business,  for  they  will  take  loans  that  more 
competent  lenders  refuse  to  consider,  and  they  will 
also  be  found  to  be  the  most  insistent  when  offering  to 
sell  them,  and  are  always  the  ones  who  will  offer  the 
investor  the  greatest  apparent  bargains. 


IX 

IMPORTANCE  OF  PROPER  LOCAL  CONNECTIONS 

A  VERY  large  proportion  of  the  great  number  of 
mortgage  loans  which  are  absorbed  each  year  by  inves- 
tors are  originally  made  for  that  market  by  local 
lenders,  and  as  this  seems  to  be  the  most  available 
source  of  supply  for  the  average  investor  the  relations 
existing  between  the  buyers  and  sellers  of  such  secur- 
ities should  be  entitled  to  a  careful  consideration. 

(It  should  be  kept  in  mind  that  distinctions  are 
herein  made  for  the  purposes  of  this  discussion,  in 
the  use  of  the  words  "investor"  as  one  who  procures 
mortgages  for  investment  purposes,  and  "lender"  as 
one  who  makes  loans,  acting  either  as  the  agent  of 
the  investor  or  with  the  purpose  of  offering  the 
mortgages  upon  the  market.) 

Danger  lies  in  the  path  of  the  investor  who  is  indif- 
ferent or  careless  as  to  the  medium  through  which  he 
gets  his  securities,  for  if  he  is,  he  will  be  very  sure 
at  sometime  to  find  himself  connected  with  persons 
who,  however  exceptional  they  may  be  in  other  re- 
spects, are  lacking  in  what  may  be  called  mortgage 
loan  judgment. 

They  may,  for  example,  be  persons  in  whose  minds 
one  idea  is  apt  to  overshadow  all  others,  and  they 
may  have  false  notions  of  the  value  of  high  interest 
rates,  large  commissions  or  other  more  indirect  profits 
from  loans. 

57 


58  MORTGAGE  LOAN  VALUES 

They  may  be  unduly  aggressive,  and  in  following 
the  main  ol)ject  of  geltin<?  the  business  away  from 
their  competitors,  maj^  be  disposed  to  minimize  the 
faults  of  the  security  and  to  overrate  its  o-ood  points. 

They  may  be  too  optimistic  and  inclined  to  dist-ount 
the  future  and  accept  promises  of  future  betterments 
as  accomplished  facts,  or  to  bolster  up  weak  loans  with 
personal  indorsements  or  the  stipulation  for  prepay- 
ments, which,  if  made,  would  make  the  loans  good. 

Thej^  may  be  too  politic  and  allow  the  high  social 
or  political  standing  of  the  applicant  or  the  chance  of 
granted  favors  being  reciprocated,  or  even  considera- 
tions of  personal  friendship,  to  have  weight  in  their 
loan  decisions. 

They  may  be  too  liberal  in  their  interpretation  of 
the  ordinary  loan  rules,  and  what  is  most  common, 
they  may  be  too  careless  in  the  details  of  the  work  to 
fit  the  requirement  of  a  businesslike  investor. 

The  loan  connections  which  are  made  with  local 
lenders  are  matters  of  grave  importance  and  although 
the  investor  may  realize  that  there  are  certain  unde- 
sirable possibilities  in  ill-advised  connections,  unless 
he  is  exceedingly  careful  he  may  easily  overlook  im- 
portant points  or  be  deceived  by  the  fact  of  the  lend- 
er's unquestionably  high  character  and  financial 
standing. 

If  he  is  neither  indifferent  nor  incautious,  however, 
and  makes  an  intelligent  preliminary  investigation  of 
the  proposed  agency,  there  is  little  danger  that  he  will 
make  any  serious  mistake,  for  his  choice  is  seldom  cir- 
cumscribed in  this  particular  and  if  the  agency  which 
is  under   consideration  does  not   measure  up   to  the 


MORTGAGE  LOAN  VALUES  59 

proper  standard  he  can  nsually  find  other  persons  in 
tliat  loeality  wlio  are  wholly  competent  and  relial)h' 
and  with  w^hom  he  can  form  loan  connections. 

I  f  both  the  investor  and  the  lender  are  experienced 
in  the  l)usiness  and  familiar  with  the  contemplated 
territory,  they  are  very  likely  to  agree  on  all  matters 
except  perhaps  as  to  the  d-egree  of  importance  which 
should  attach  to  certain  points — for  instance,  while 
they  may  agree  on  all  other  points,  one  may  hold  the 
personal  hazard  to  be  very  important  as  indicating 
the  probable  performance  or  non-performance  of  the 
loan  contract,  and  the  other  may  give  it  slight  consid- 
eration as  being  no  real  part  of  the  security. 

It  is  very  necessary  that  all  such  questions  should 
be  fully  discussed  and  that  the  ideas  of  the  investor 
and  lender  should  be  in  harmony  on  all  important 
matters;  but  prior  to  their  discussion  the  investor 
should  know  that  the  lender  has  a  practical  knowledge 
of  the  conditions  and  values  in  all  parts  of  the  terri- 
tory in  which  he  operates  and  that  he  is  both  honest 
and  careful. 

He  should  also  know  that  the  lender  is  not  only  com- 
petent himself  but  that  he  maintains  an  efficient 
working  force  and  does  not  trust  to  the  work  of 
"cheap"  inspectors,  attorneys  and  clerks  and  that  he 
has  a  reputation  among  his  borrowers  for  fair  dealing 
and  moderate  charges,  and  among  his  competitors  for 
understanding  his  ])usiness  and  taking  none  but  good 
loans. 

The  lender's  business  should  also  be  a  prosperous 
one,  and  he  should  have  a  fair  amount  of  financial 
responsibility;  but  in  this  matter  of  financial  respon- 


60  MORTGAGE  LOAN  VALUES 

sibilily  the  investor  should  wei<;'li  the  facts  very  care- 
fully, remembering  that  the  reputation  of  possessing 
large  means  often  carries  with  it  an  undeservedly  good 
reputation  in  other  matters,  and  that  the  lender  may 
for  that  reason,  and  independently  of  the  true  facts, 
bear  a  reputation  for  possessing  other  qualifications 
which  he  does  not  possess,  and  Avhich  are  of  greater 
importance  to  the  investor  than  is  the  single  one  of 
his  having  abundant  funds. 

While  investigations  along  the  above  mentioned 
lines  should  be  very  thorough  and  while  nothing 
should  be  accepted  that  is  not  found  to  conform  to 
sound  practice,  the  investor  should  not  lose  sight  of 
the  fact  that  the  fully  competent  lender  will  under- 
stand the  peculiar  needs  of  his  own  organization,  his 
territory  and  his  borrowers  better  than  they  are  likely 
to  be  understood  by  the  investor ;  and  unless  he  is  will- 
ing to  recognize  this  fact  there  will  be  many  occasions 
for  needless  friction  in  their  business  relations,  to  the 
disadvantage  of  both.  For  instance,  the  investor  who 
makes  loans  directly  to  borrowers  will  follow  certain 
rules  and  practice  in  the  matter  and  although  these 
may  be  suited  to  the  class  of  property  and  the  terri- 
tory where  they  are  applied,  they  may  not  be  well 
suited  to  other  conditions.  Nevertheless  he  may  insist 
that  they  shall  be  followed  by  the  lender  or  corre- 
spondent who  represents  him  in  another  section  where 
they  are  not  applicable — as  did  the  northern  investor 
in  southern  securities  when  he  insisted  that  each  house 
must  have  a  good  cellar. 

Mistakes  of  this  kind  are  not  likely  to  occur,  how- 
ever, if  the  investor  is  able  to  go  upon  the  ground 


MORTGAGE  LOAN  VALTTES  61 

and  to  become  personally  acquainted  with  the  condi- 
tions before  entering  any  given  field,  and  it  is  very 
desirable  that  he  shonld  do  this  if  possible,  for  it  may 
not  only  reveal  facts  which  otherwise  might  be  un- 
thonght  of  by  him  Ijnt  it  will  afford  him  the  oppor- 
tunity for  understanding  any  peculiar  requirements 
of  the  territory  w^hich  should  be  taken  into  account  in 
his  dealings  with  the  lender,  and  an  examination  of  a 
number  of  securities  that  have  been  accepted  by  the 
lender  will  indicate  more  clearly  than  would  any 
other  test  the  measure  of  that  lender's  knowledge  of 
the  loan  business  and  his  conservatism  and  the  char- 
acter and  efficiency  of  his  organization  and  equip- 
ment. 


X 

BLANK  APPLICATION  AND  REPORT  FORMS 

The  equipment  of  the  lender  should  of  course  in- 
clude all  of  the  necessary  blank  forms,  and  these 
should  be  very  carefully  prepared;  each  form  should 
be  submitted  to  a  competent  attorney  of  the  State  in 
which  loans  are  to  be  made,  and  his  opinion,  of  course, 
should  be  regarded  as  sufficient  and  final  concernino- 
all  such  blanks  as  deeds  of  trust,  mortgages,  notes 
bonds,  affidavits,  disclaimers,  etc.,  the  proper  form 
and  substance  of  which  are  necessary  to  the  legality  of 
loan  transactions. 

There  are  also  certain  preliminary  papers  which 
are  of  importance,  such  as  applications,  inspection 
reports  and  agency  contracts.  Tlie  form  of  these 
blanks  should  also  be  approved  by  the  attorney  but 
they  should  not  be  adopted  by  the  lender  until  they 
have  also  been  passed  upon  by  a  practical  loan  man 
who  has  had  experience  in  the  territory  and  with  the 
class  of  securities  under  consideration. 

No  loans  upon  Real  Estate  should  he  considered 
unless  they  are  based  upon  written  applications  and 
reports  but  the  forms  for  these  are  often  carelessly 
adopted  in  the  belief  that  such  things  are  of  a  second- 
ary importance  inasmuch  as  their  use  is  not  ess?ntial 
to  the  legality  of  the  loans,  which  conclusion  is  only 

62 


MORTGAGE  LOAN  VALUES  63 

true  in  the  same  sense  that  it  is  true  that  an  abstract 
of  title  is  not  essential;  aud  there  is  quite  as  little 
reason  for  indifference  or  carelessness  in  regard  to 
one  as  to  the  other,  for  the  facts  in  each  matter  are 
really  of  vital  importance  and  while  the  abstract  pur- 
ports to  show  them  as  to  the  title,  the  application,  in 
connection  with  the  inspector's  report,  is  expected  to 
show  them  as  to  the  pliysical  and  moral  features  of 
the  security. 

The  application,  when  accepted,  forms  the  basis  of 
the  loan  contract,  and  it  is  important  that  this  blank 
should  provide  for  statements  and  answers  which  are 
simple  and  concise  as  well  as  comprehensive ;  it  should 
provide  for  all  necessary  statements  and  for  no  un- 
necessary ones ;  and  it  should  also  be  suited  to  the  ter- 
ritory and  to  the  general  class  of  business  for  w^hich 
it  is  intended  to  be  used. 

Certain  facts  must  be  shown  in  a  farm  application 
which  would  not  be  at  all  pertinent  to  a  city  applica- 
tion and  vice  versa,  nor  do  the  requirements  for  the 
same  kinds  of  property  ahvays  conform  in  these  re- 
spects when  the  properties  are  located  in  different 
sections ;  for  instance,  those  facts  relating  to  irrigation, 
or  homestead  rights,  or  diversity  of  crops,  etc.,  which 
are  necessary  to  be  known  in  one  section  may  be 
wholly  irrelevant  or  of  very  minor  importance  in 
another.  It  should  not  be  attempted,  then,  to  make  a 
single  blank  form  cover  too  wide  a  field. 

Almost  any  applicant  will  overestimate  the  merits 
of  his  offering,  and  wnll  seek  to  avoid  any  admission 
of  its  faults,  and  if  the  application  blank  provides 
for  statements  or  answers  where  the  facts  can  onlv  be 


64  MORTGAGE  LOAN  VALUES 

estimated,  such  estimates  will  seldom  be  found  to  be 
dependable;  and  if  it  provides  for  answers  which  will 
not  be  insisted  upon  by  the  lender,  or  contains  ques- 
tions which  may  be  confusing  to  the  applicant  or 
otherwise  hard  for  him  to  answer  correctly,  or  if  it 
provides  for  information  which  is  not  fully  applicable 
to  the  matter  in  hand,  a  large  proportion  of  the  ap- 
plications submitted  will  be  imperfectly  filled  out, 
not  only  as  to  these,  but  also  as  to  other  matters.  The 
blank  should,  therefore,  be  one  which  the  lender  can 
consistently  insist  shall  be  fully  filled  out  before  it 
will  receive  his  consideration. 

The  application  should  state  the  amount,  the  time, 
the  rate  of  interest,  and  the  terms  of  the  proposed 
loan ;  it  should  give  a  legal  description  of  the  property 
which  would  be  sufficient  to  enable  a  surveyor  to  posi- 
tively locate  and  plat  it  and  should  also  contain  a 
statement  of  the  location,  general  characteristics,  im- 
provements, use  and  occupancy  of  the  property  which 
would  be  sufficient  to  enable  an  inspector  who  is  not 
a  surveyor  to  positively  locate  and  identify  it. 

It  should  give  a  statement  of  the  main  facts  which 
go  to  show  the  present  value  and  earning  power  of 
the  property,  and  a  brief  statement  showing  the  kind 
and  present  condition  of  the  title  under  which  the 
applicant  claims  ownership  and  of  any  claims  or  mat- 
ters which  might  become  claims  against  it. 

It  should  contain  a  brief  personal  and  financial 
statement  giving  the  applicant 's  age,  business  and  ad- 
dress, and  if  married,  the  name  and  age  of  his  wife, 
and  an  approximate  estimate  of  his  holdings  and  his 
indebtedness,  and  should  also  state  the  purpose  for 


MORTGAGE  LOAN  VALUES  65 

which  the  money  is  to  be  borrowed ;  and  it  sliovild  give 
a  short  statement  covering  any  agreements  made  as 
to  the  fnrnishing  of  abstracts,  the  payment  of  taxes 
and  insurance  and  of  any  expenses  that  may  be  in- 
curred in  making  and  caring  for  the  loan. 

The  application  should  be  made  by  the  owner  of 
the  property  and  signed  by  him  in  person ;  and  if  he 
is  required  to  make  affidavit  as  to  the  truth  of  his 
statements  it  will  often  afford  the  lender  some  protec- 
tion against  careless  statements  or  attempted  frauds. 

The  inspector's  report  blank  is  not  subject  to  the 
same  requirements  as  is  the  application  blank  in  those 
matters  which  are  a  part  of  the  loan  contract,  nor 
to  the  same  requirements  as  to  simplicity  and  brevity, 
but  it  is  also  a  very  important  loan  paper.  Like  the 
application  blank  it  should  be  suited  to  the  territory- 
and  class  of  property  for  which  it  is  to  be  used,  but  it 
ma}^  and  should  embody  reports  on  any  or  all  other 
matters  which  will  assist  the  lender  in  reaching  proper 
conclusions.  Its  most  vital  part  is  perhaps  its  sliowing 
that  the  property  has  been  visited  and  examined  by 
the  inspector  and  has  been  positively  identified  by 
him  as  that  offered  in  the  application,  for,  unless  this 
is  the  fact,  any  such  report  is  far  worse  than  useless. 
(In  this  connection  it  may  be  remarked  that  a  photo- 
graph of  city  property,  or  a  plat  of  farm  property,  is 
always  of  value.) 

The  inspection  report  should  go  to  the  verification 
■or  correction  of  the  statements  made  by  the  applicant, 
and  should  go  much  further  than  does  the  application 
into  those  details  which,  taken  in  the  aggregate,  indi- 
cate the  general  desirability  of  the  security,  its  de- 


GG  MORTGAGE  LOAN  VALUES 

pciidahle  ineomo  capacity,  its  al)ility  to  withstand  mis- 
luaiiagcnieiit  or  neglect,  its  availal)ility  for  othei-  pur- 
poses than  its  present  uses,  and  its  sahil)ility  under 
any  adverse  conditions  that  are  likely  to  arise  during 
the  life  of  the  loan. 

Any  physical,  legal,  or  business  conditions  which 
are  peculiar  to  the  section  should  also  l)e  sliown  in 
their  relation  to  the  property  under  consideration; 
for  instance,  the  liability  of  overflows  or  erosions,  un- 
usual homestead  and  exemption  laws,  irrigation  mat- 
ters, one  crop  conditions,  etc.  It  should  show  the 
general  moral  hazard  as  indicated  by  the  surrounding 
conditions  of  prosperity,  and  also  show  tlie  results  of 
an  investigation  of  the  personal  hazard ;  it  should 
show  by  whom  the  property  is  occupied  and  the 
nature  of  his  claim  of  right  to  such  occupancy,  and  it 
should  show  in  detail  and  in  the  aggregate,  the  inspec- 
tor's opinion  of  the  present  cash  market  value  of  the 
property,  and  contain  liis  definite  recommendation  as 
to  the  amount  which  should  be  loaned  upon  it. 

Certain  facts  in  addition  to  those  relating  to  the 
contract  itself  are  always  necessar\'  to  be  first  shown 
by  the  application  in  order  that  the  lender  may  be 
able  to  judge  in  advance  of  an  inspection  whether  or 
not  it  may  be  worth  while  to  make  one,  but  as  the 
applicant  is  always  an  interested  party  it  is  a  safe 
rule  for  the  lender  to  depend  so  far  as  possible  upon 
an  expert  and  unbiased  inspection  report  covering  all 
of  the  material  facts,  and  especially  all  such  facts  as 
might  be  colorable  by  the  applicant 's  self  interest. 


XI 

LOCAL   LENDING   AGENCIES 

The  lonclor  who  deals  only  in  city  loans  usually 
obtains  both  his  borrowers  and  his  investors  through 
the  general  publicity  which  he  gives  his  business,  his 
financial  standing  furnishes  him  with  one  of  his  prin- 
cipal arguments,  and,  in  a  way,  his  relations  with  both 
borrowers  and  investors  are  on  a  more  impersonal 
basis  than  is  the  case  in  a  farm  loan  business. 

On  the  other  hand,  the  lender  who  deals  in  farm 
securities  usually  depends  more  upon  the  efforts  of 
his  sub-agents  to  secure  his  business,  his  borrowers 
are  apt  to  be  less  impressed  by  his  financial  condi- 
tion than  they  are  by  his  reputation  for  fair  dealing, 
and  while  his  business  relations  are  usually  with 
fewer  investors  they  are  more  likely  to  be  sul)ject  to 
the  terms  of  a  specific  contract  which  anticipates  a 
continuation  of  the  business. 

The  business  understanding  between  the  investor 
and  the  lender  is  in  some  cases  simply  a  working  agree- 
ment and  in  others  it  takes  the  form  of  a  written  con- 
tract. In  any  case  its  provisions  follow  along  certain 
lines  which,  in  the  main,  are  very  similar  to  one 
another,  although  they  sometimes  differ  as  to  details, 
but  it  is  of  great  importance  that  in  every  case  it 
should  be  comprehensive  and  clearly  understood  by 
both  parties. 

67 


68  MORTGAGE  LOAN  VALUES 

Ordinarily  the  investor  agr-ees,  at  least  tentatively, 
that  he  will  make  investments  from  time  to  time  of 
estimated  approximate  snms  in  certain  designated 
territory,  in  secnrities  of  a  stipulated  class  and  char- 
acter, at  a  stated  rate  of  interest  and  on  certain  speci- 
fied terms  of  contract  with  the  borrower,  and  tliat  he 
will  recognize  the  lender  as  his  local  correspondent 
in  such  territory;  and  the  lender  on  his  part  agrees 
that,  so  far  as  he  is  able  to  do  so,  he  will  furnish  the 
investor  with  the  desired  amount  of  securities,  wliich 
shall  conform  in  all  respects  to  his  requirements. 

The  amount  of  securities  to  be  furnished  by  the 
lender,  and  of  the  funds  to  be  supplied  him  by  the 
investor  can  only  be  estimated  at  the  outset,  for  the 
lender  can  have  no  real  control  over  the  demand  for 
funds  in  his  territory,  and  the  investor  may  easily 
find  it  difficult  to  adjust  his  available  capital  to  any 
unusual  or  unexpected  requirements. 

The  lender  usually  wishes  to  make  as  definite  an 
arrangement  as  possible  with  an  investor  who  can 
furnish  with  reasonable  regularity  an  amount  of 
funds  for  investment  at  an  interest  rate  and  upon 
terms  all  of  which  will  enable  the  lender  to  furnish 
the  desired  securities  with  profit  to  himself;  but  in 
addition  to  making  connections  which  give  promise  of 
proving  satisfactory  in  this  respect,  it  is  quite  import- 
ant to  the  lender  that  they  should  be  such  as  will  aid 
him  in  maintaining  his  organization,  and  keeping  in 
as  close  touch  as  possible  with  his  borrowers  in  order 
that  he  may  profit  by  their  future  business. 

To  the  end  that  he  maj^  accomplish  this  purpose  and 
at  the  same  time  offer  inducements  to  the  investor, 


MORTGAGE  LOAN  VALUES  69 

the  lender  usually  agrees  that,  until  any  loan  is  pciid, 
he  will  cause  the  pi-operty  to  be  kept  insured  in  ac- 
cordance with  the  terms  of  the  mortgage  or  deed  of 
trust,  that  he  will  see  to  the  payment  of  all  taxes  and 
assessments  that  may  become  a  lien  against  tlie  prop- 
erty, and  that  he  will  attend  to  the  collection  and  re- 
mittance of  interest  to  the  investor,  all  without  any 
charge  for  such  services. 

He  will  guarantee  the  title  to  the  property  to  be  a 
marketable  one  (there  being  but  few  perfect  titles), 
and  that  the  mortgage  or  deed  of  trust  is  a  first  lien 
against  it,  and  will  also  guarantee  that  if  the  property 
is  re-examined  by  the  investor  within  a  certain  stipu- 
lated time,  it  will  be  found  to  be  satisfactory  to  him. 
and  that  if  found  to  be  unsatisfactory,  the  loan  will 
be  at  once  taken  up  and  repayment  made. 

The  attempt  is  sometimes  made  to  cover  this  point 
by  a  guarantee  that  upon  examination  the  property 
will  be  found  "to  be  as  represented''  Init  this  form  is 
objectionable,  as  it  opens  the  door  for  niisundfu-stand- 
ings  and  discussions  that  are  based  uyxm  difference  of 
opinion  and  judgment  only. 

In  these  agreements  a  stated  time  is  usually  allowed 
the  investor  for  making  re-inspections  of  the  securities 
he  purchases,  and  he  should  insist  upon  the  time  al- 
lowed being  ample  for  the  purpose,  and  should  never 
neglect  to  have  such  inspections  made. 

It  is  also  very  important  that  the  person  who  does 
this  work  should  be  expert  in  that  line,  not  only  Ihat 
he  may  do  justice  to  the  interests  of  the  investor,  but 
that  he  may  not  cause  an  injustice  to  be  done  to  the 
lender  by  requiring  him  to  take  up  loans  which  should 


70  MORTGAGE  LOAN  VALUES 

have  been  approved.  Noi-  is  lliis  llu'  oiil\'  reason,  for 
if  he  is  ineonipetent  he  v/ill  never  ho  able  to  eonceal 
that  Faet  from  the  lender,  whose  poor  opinion  of 
the  ins])eetor's  ability  to  proteet  the  interests  of  his 
principal  may  tempt  him  lo  seek  advantap:e  to  him- 
self from  that  faet. 

In  selling  his  mortgages  the  lender  soitietimes  makes 
a  broader  guarantee  than  the  one  above  indicated,  fre- 
quently he  does  not  specify  any  time  limit  within 
which  the  re-examinations  shall  be  made  and  some- 
times even  goes  to  the  extent  of  indorsing  the  notes  of 
the  borrower. 

The  danger  of  loss  to  liim  by  reason  of  such  l)road 
guarantees  is  small  provided  all  of  liis  se;'urities  have 
been  wisely  and  carefully  selected,  and  it  may  be  made 
yet  smaller  if,  by  its  terms,  he  is  allowed  a  reasonable 
time  after  any  foreclosure  of  a  loan  before  it  becomes 
effective.  But  any  such  guarantee  is  nevertheless  of 
doubtful  value,  for  it  unavoidably  creates  a  contingent 
liability  against  the  maker  which,  althougli  small  at 
first,  may  develop  a  dangerous  growth  unless  all  of 
his  loans  are  very  judiciously  made,  for  each  loan 
that  is  made  adds  its  new  liability,  and  each  year  that 
passes  brings  changes  in  the  old  securities  w^hich  may 
add  more,  until,  if  his  business  is  considerable,  his 
guarantee  becomes  practically  worthless. 

It  is  true  that  if  the  lender  is  naturally  conserva- 
tive and  cautious  the  making  of  a  broad  guarantee 
may  incline  him  to  be  more  so  and  cause  him  to  esti- 
mate with  greater  care  the  possibility  of  any  future 
depreciation  in  values,  and  therein  lies  the  only  ad- 
vantage it  gives  to  the  investor;  for  if  the  lender  is 


MORTGAGE  LOAN  VALUES  71 

not  naturally  consorvaiivo  and  cautious,  the  making 
of  such  guarantee  will  hardly  make  him  more  so.  In- 
stead, he  will  be  in-lined,  despite  any  guarantee  which 
he  may  make,  to  ignore  a  danger  of  loss  that  seems  to 
him  to  be  remote,  and  he  may  be  tempted  to  use  the 
guarantee  to  strengthen  otherwise  weak  loans. 

It  is  also  true  that  the  investor  may  be  disposed  to 
lean  upon  a  broad  guarantee  as  being  at  least  some 
part  of  his  securit}',  and  that  he  may  either  neglect  to 
make  careful  re-examinations  of  the  securities,  or  to 
accept  those  which  he  would  otherwise  decline  as  not 
measuring  up  to  his  standard,  and  thus  rest  to  some 
extent  upon  a  guarantee  that  might  easily  prove  to  be 
a  mere  rope  of  sand. 


XII 

CONTRACT  BETWEEN  INVESTORS  AND  LENDERS 

There  are  several  other  matters  pertaining  to  the 
business  relations  of  investors  and  lenders  which, 
whether  or  not  they  are  made  parts  of  a  specific 
written  contract,  should  be  clearly  understood  by 
the  interested  parties  before  any  loan  connections  are 
made  by  them. 

It  should  be  understood,  for  instance,  that  all  forms 
used  by  the  lender  shall  be  satisfactory  to  the  investor 
and  that  the  forms  of  notes  and  mortgages  or  deeds  of 
trust  shall  accord  with  the  approved  legal  forms  of 
the  State  in  which  they  are  used,  and  it  should  be 
stipulated  that  no  loans  shall  be  made,  either  directly 
or  indirectly,  to  any  persons  having  an  interest  in  the 
agency  contract. 

It  should  also  be  understood  and  agreed  that  in  all 
matters,  and  especially  in  those  involving  the  pay- 
ment of  commissions  and  expenses,  the  treatment  of 
the  borrower  by  the  lender  shall  be  fair  and  reason- 
able, for  the  reason  that  the  satisfied  borrower  adds 
to,  and  the  dissatisfied  one  detracts  from,  the  desir- 
ability of  the  security. 

Nor  should  the  investor  on  his  part  ever  attempt  to 
drive  a  hard  bargain  with  the  lender,  for  if  he  should 
induce  him  to  give  more  than  he  can  afford,  he  may 
expect  that  the  evil  consequences  will,  to  some  extent, 
re-act  upon  his  own  interests. 

72 


MORTGAGE  LOAN  VALUES  73 

The  lender  who  wishes  to  make  a  loan  connection  is, 
in  fact,  always  inclined  to  offer  all  that  he  can  reas- 
onably afford  to  give;  indeed,  the  competition  of 
others  who  desire  the  connections  is  apt  to  make  it 
necessary  for  him  to  do  so,  but  if  lie  deals  only  in  tlie 
best  class  of  securities  he  cannot  offer  as  high  a  rate 
of  interest  as  can  the  lender  who  deals  in  more  doubt- 
ful loans;  if  his  charges  against  the  borrower  are 
reasonable  ones  he  cannot  offer  the  amount  of  broker- 
age that  he  otherwise  might  offer;  if  he  is  wholly 
responsible  financially  he  will  scarcely  make  the 
sweeping  and  unlimited  guarantees  w^hich  a  more 
irresponsible  person  would  make,  and,  all  in  all,  the 
measure  of  his  willingness  to  give  more  than  others 
are  willing  to  give  is  often,  if  not  alwa3%s,  inversely 
the  measure  of  the  desirability  of  his  connection. 

The  investor  is  usually  a  city  man  and  if  his  busi- 
ness is  confined  to  city  loans  he  will  deal  with  matters 
upon  which  he  is  likely  to  be  well  posted,  but  the  farm 
loan  business  has  peculiarities  with  which  he  is  not  so 
apt  to  be  thoroughly  familiar,  and  he  will  perhaps,  in 
such  cases,  frequently  find  himself  hampered  by  his 
lack  of  knowledge  concerning  the  field  conditions. 

It  is  quite  important,  however,  that  he  should  un- 
derstand them;  he  should  understand,  for  instance, 
that  the  lender  who  covers  a  farm  loan  field  finds  it 
necessary  to  have  sources  through  which  he  may 
receive  applications  in  proper  form  from  the  various 
neighborhoods  or  counties  in  which  he  operates,  and 
through  which  he  can  obtain  at  first  hand  reliable 
information  as  to  the  loan  offerings. 

He  should  understand  that  the  personal  acquaint- 


74  ]\rORTGAGE  LOAN  VALUES 

aiice  of  the  pro.S])ective  horrowci-  with  a  person  wlio 
has  access  to  loan  funds,  and  in  whose  reputation  for 
fair  dealing  he  has  confidence,  plays  an  inipoi-tant 
part  in  the  initial  step  in  almost  every  farm  loan 
transaction,  for  the  borrower  will  almost  invariably 
go  to  such  a  person  in  pi-eference  to  going  to  others. 

Other  considerations  also  enter  into  the  situation; 
for  instance,  the  applicant  himself  is  seldom  expert  in 
filling  an  application  blank  properly,  and  is  apt  to 
overstate  the  facts  which  are  favorable  to  him  and  to 
ignore  or  minimize  those  which  are  unfavorable ;  there 
are  also  many  persons  who,  if  allowed  to  do  so,  will 
present  applications  which  are  not  -worthy  of  any 
consideration. 

It  is  very  necessarj-  then  that  the  lender  should 
have  local  representatives  or  sub-agents  who  are 
active,  well  known  and  respected,  in  order  that  at 
least  a  fair  share  of  the  best  business  may  be  obtained, 
and  it  is  also  important  that  tliey  should  be  compe- 
tent, careful  and  locally  well  informed  in  order  that 
bad  business  may,  as  far  as  possible,  be  weeded  out  at 
its  source. 

The  comparatively  limited  area  which  constitutes 
an  ordinary  farm  loan  field  is  therefore  organized  by 
the  lender,  into  w^hat  may  be  called  neighborhood  or 
county  units,  in  each  of  which  he  arranges  with  a 
local  bank  or  an  attorney  or  a  Real  Estate  dealer  to 
act  for  him  upon  a  commission  basis  in  procuring  ap- 
plications and  in  doing  such  other  preliminary  work 
as  may  be  required. 

The  proper  selection,  training  and  oversiglit  of 
these   sub-agents    is   attended   Avith   much   work   and 


]\IORTGAGE  LOAN  VALUES  75 

many  difficulties,  and  those  among  them  who  are  able 
to  use  good  loan  judgment  and  are  persons  who  may 
be  depended  upon  to  present  all  matters  fully  and 
honestly  are  very  valuable  assets  to  the  organization 
of  any  lender  as  well  as  to  the  investors  with  whom  he 
may  be  associated. 

The  investor  may,  when  necessary,  go  upon  the 
market  and  purchase  the  needed  securities  that  his 
regular  loan  correspondents  have  failed  to  furnish, 
although  it  is  less  satisfactory  to  do  this  than  it  is  to 
get  them  through  tried  and  proved  sources,  but,  on 
the  other  hand,  the  lender  whose  outlet  connection 
fails,  is  placed  in  a  much  more  serious  situation,  for 
relief  is  more  difficult  to  obtain  and  unless  it  is  ob- 
tained promptly  the  disturbance  to  his  business  is 
greater. 

He  cannot,  of  course,  hope  to  retain  the  services  of 
his  sub-agents  unless  he  is  able  to  give  their  offerings 
reasonably  prompt  attention  and  for  this  reason  he  is 
little  inclined  to  depend  wholly  upon  connections 
which  are  barely  sufficient  to  meet  his  average  needs, 
and  his  usual  practice  is  to  guard  this  point  by  pro- 
viding for  more  than  one  outlet  for  his  securities. 

lie  at  least  endeavors  to  secure  some  minor  con- 
nections which  upon  occasion  might  be  developed  or 
which  might  be  made  to  serve  temporarily  to  bridge 
over  the  loss  of  his  principal  outlet  if  that  loss  should 
occur. 

The  fact  of  a  lender  having  agency  arrangements 
for  the  same  territory  with  more  than  one  investor  is 
not  necessarily  harmful  to  the  interests  of  any  of 
them,  but  this  situation  should  be  watched,  for  it  con- 


76  MORTGAGE  LOAN  VALUES 

tains  possibilities  for  the  opportunist  and  iniglit  be 
made  to  favor  one  investor  as  against  another. 

No  lender,  for  example,  may  hope  to  make  any 
great  number  of  loans  each  of  which  will  measure  up 
to  an  equal  standard  of  excellence,  and  it  will  be  but 
natural  for  him  to  present  his  best  offerings  to  the 
investor  whose  business  he  values  the  most  liighly  and 
his  less  desirable  ones  to  those  whose  business  is  not 
so  important  to  him  or  who  are  disposed  to  drive  hard 
bargains  in  interest  rates,  expenses  or  disr-ounts. 

It  may  be  urged  in  answer  to  this  that  if  the  secu- 
rities are  safe  that  that  is  all  the  investor  need  ask, 
for  in  no  case  could  he  collect  more  than  was  owing  to 
him  and  that  their  re-inspection  should  cover  this 
point;  theoretically  this  answer  is  sufficient  but  the 
practical  loan  man  knows  that  there  is  a  very  real 
difference  in  desirability  even  among  loans  that  are 
not  affirmatively  bad,  and  that  such  difference  often 
depends  upon  facts  which  could  easily  be  concealed 
from  the  most  expert  inspector. 

The  investor  should  also  know  the  form  and  nature 
of  the  lender's  profits;  the  borrower,  as  a  matter  of 
course,  pays  all  of  the  expenses  and  profits  incident 
to  his  loan  transaction ;  the  sum  which  is  thus  charged 
against  him  being  calculated  to  cover  the  necessary 
expenses  of  his  loan,  with  a  reasonable  amount  added 
as  his  share  of  the  general  expenses  and  just  profits  of 
the  lender.  The  plan  which  is  adopted  for  the  pay- 
ment of  these  charges  is  largely  governed  by  local 
usage ;  sometimes  the  payment  is  in  the  form  of  a 
cash  commission,  sometimes  in  an  agreed  sum  secured 
by  a  second  mortgage  and  sometimes  it  is  covered  by 


MORTGAGE  LOAN  VALUES  77 

an  excess  of  interest  above  the  rate  at  which  the  loan 
is  made  for  the  investor. 

When  a  cash  commission  is  paid  by  the  borrower  the 
interest  of  the  lender  in  the  loan  is  to  some  degree 
ended,  and  for  this  reason  there  would  seem  to  be 
an  advantage  to  the  investor  in  either  of  the  other 
plans,  for  then  the  lender's  interest  continues  for  a 
time  at  least;  but  whatever  plan  is  followed  in  this 
matter,  the  main  interest  of  the  investor  is  in  the 
reasonableness  of  the  lender's  charges. 

In  considering  this  feature  the  investor  should 
remember  that  the  legitimate  overhead  expenses  inci- 
dent to  making  loans  in  some  sections  and  in  some 
classes  of  securities  are  much  greater  than  in  others 
and  he  should  be  very  sure  that  the  lender's  mind  is 
not  clouded  by  a  greed  that  will  incline  him  to  avoid 
any  proper  expenses  in  order  to  increase  his  own 
profits,  or  to  impose  smy  harsh  terms  upon  the  bor- 
rower to  that  end. 


XIII 

BUSINESS   RELATIONS  OF  INVESTORS  AND  LENDERS 

It  IS  desirable  in  the  interest  of  the  clear  under- 
standings and  jnst  actions  which  will  tend  to  make 
their  relations  pleasant  as  well  as  profitable  that  the 
investor  and  lender  shonld  each  be  as  well  informed 
as  possible  of  conditions  "at  the  other  end  of  the  line," 
for  it  is  one  of  those  connections  in  which  each  party 
may  advance  and  protect  his  own  interests  by  the 
consideration  which  he  gives  to  the  interests  of  the 
other. 

The  lender  therefore  should  endeavor  to  maintain  a 
dependable  organization  in  which  no  "slipshod"  work 
is  permitted ;  he  shonld  endeavor  to  obtain  and  keep  a 
satisfactory  and  satisfied  line  of  borrowers  who  Avill 
realize  the  importance  of  complying  strictly  with  the 
terms  of  their  loan  contracts ;  and  he  shonld  endeavor 
to  take  without  any  unreasonable  delay  such  loans  as 
may  prove  to  be  desirable.  It  is  not  intended  to  say, 
however,  that  these  matters  should  ever  be  hurried, 
for  no  more  dangerous  practice  could  be  followed,  but 
only  to  say  that  there  should  not  be  any  unnecessary 
delay,  for  this  would  be  manifestly  unfair  to  the  ap- 
plicant whose  need  for  prompt  action  may  be  urgent 
and  who  agrees  to  accept  the  loan  if  it  is  granted  and 
thus  bars  himself,  pending  its  acceptance  or  rejec- 
tion, from  securing  it  from  another  source. 

78 


MORTGAGE  LOAN  VALUES  79 

AVlu'u  offering  loans  to  the  investor  tlie  lender 
should  confine  himself  to  the  class  and  character  of 
securities  which  the  investor  has  indicated  as  being 
satisfactory  to  him,  and  should  refrain  from  present- 
ing such  as  would  for  any  reason  be  exceptions  to  the 
agreed  class  although  he  may  consider  them  to  be 
good  loans,  because  if  the  investor  has  defined  certain 
lines,  he  usually  wishes  to  stay  within  their  limits  and 
does  not  care  to  consider  "exceptions." 

He  should  also  appreciate  the  fact  that  the  investor 
desires  his  investments  to  be  as  permanent  as  possi- 
ble and  that  he  will  not  be  pleas;'d  with  propositions 
to  disturb  them  l)y  partial  releases,  unauthorized 
repayments,  etc.,  after  the  minds  of  the  parties  have 
met  upon  the  terms  of  the  contract  and  the  loan  has 
been  closed. 

lie  should  know  that  if  he  sends  incomplete  and 
imperfect  applications  and  i  eports  to  the  investor,  in 
which  there  are  obvious  mistakes  or  mis-statements  or 
unfilled  blanks  or  the  "illuminating"  answers  given 
that  the  applicant  "don't  know"  or  "can't  remem- 
ber, ' '  that  the  case  is  not  advanced  but  that  this  prac- 
tice is,  at  best,  only  a  source  of  annoyance  and  delay, 
and  that  carelessness  on  his  part  even  in  compara- 
tively unimportant  matters  may  cause  the  investor  to 
doubt  his  entire  reliability  in  more  important  ones. 

He  should  keep  the  investor  informed  of  any  chang- 
ing conditions  that  may  effect  his  securities,  and  if 
he  makes  advancements  to  borroweis  for  the  purpose 
of  paying  taxes,  insurance  or  interest,  he  should  fully 
inform  the  investor  of  that  fact. 

It  will  also  be  seen  that  in  furtherance  of  satisfac- 


80  MORTGAGE  LOAN  VALUES 

tory  relations,  tlie  investor  on  liis  i)}ni  sliotild  main- 
tain as  nearly  as  possible  a  dcfiiiilc  and  dependable 
assignment  of  funds  to  the  lender  and  grant  him  such 
a  rate  and  terms  as  will  enable  him  to  do  a  profitable 
business  in  the  best  class  of  securities  and  to  handle 
all  of  the  details  of  the  work  with  the  help  of  tlie  most 
expert  assistants. 

Unless  the  lender  can  do  these  things,  his  organiza- 
tion will  soon  be  disturbed  and  will  often  suffer  dam- 
age in  places  where  it  will  be  difficult  or  impossible 
to  restore  it;  his  most  valuable  connections  may  be 
lost  to  him  and  the  best  offerings  go  elsewhere,  and, 
in  endeavoring  to  hold  on  to  his  own  profits,  he  may 
attempt  to  do  so  by  cutting  down  the  pro]^er  class  of 
work  in  investigating  and  closing  his  loans  or  l)y  deal- 
ing in  a  cheaper  class  of  securities. 

The  volume  of  business  which  is  done  through  such 
connections  must  also  rest  largely  upon  the  good  faith 
of  each  party  to  the  contract  in  working  for  the  in- 
terests of  the  connection,  and,  to  a  certain  extent, 
changing  conditions  of  supply  and  demand  may  be 
foreseen  and  provided  against  by  them. 

Either  condition  of  a  heavy  or  a  light  demand  for 
money  is  indeed  apt  to  be  a  cause  for  an  opposite  con- 
dition to  exist  in  its  supply ;  a  period  of  heavy  borrow- 
ing diminishing  the  supply  and  a  period  of  repay- 
ments increasing  it,  with  the  compensating  fact,  how- 
ever, that  a  strong  demand  in  any  section  has  a  ten- 
dency to  attract  capital  and  that  a  ^\^eak  demand 
inclines  it  to  seek  investment  elsewhere. 

It  will  be  noted  in  studying  the  probabilities  of 
future  demands  and  future  repayments  that  the  im- 


MORTGAGE  LOAN  VALUES  81 

mediate  effect  of  unusual  or  increased  earnings  from 
Real  Estate  in  any  section  is  that  of  the  repayment  of 
mortgage  loans,  and  that,  if  such  prosperity  continues 
and  seems  to  become  stable,  there  is  a  secondary  effect 
of  increased  borrowing  for  the  purposes  of  investment 
and  development. 

On  the  other  hand,  if  the  productivity  of  the  Real 
Estate  should  be  lessened,  the  first  effect  may  be  seen 
in  an  increased  demand  for  funds  with  which  to  adjust 
unexpected  losses,  but  if  the  bad  conditions  should 
continue  they  will  not  only  have  the  effect  of  dis- 
couraging investments  and  development,  but  will 
cause  owners  to  relieve  themselves,  so  far  as  they  are 
able  to  do  so,  from  the  burden  of  the  mortgage  debts 
which  they  may  owe,  and  so,  as  has  been  said  else- 
where, there  is  a  smaller  demand  from  desirable  bor- 
rowers during  hard  times  than  there  is  during  good 
times. 

The  probabilities  for  future  business  may  thus  be 
anticipated  to  a  certain  extent,  and  while  its  volume 
cannot  be  definitely  known,  intelligent  co-operation 
of  the  investor  and  lender  will  often  serve  to  prevent 
greatly  mistaken  estimates  in  this  matter  as  well  as 
mistakes  in  other  things. 

To  those  who  may  think  that  undue  emphasis  has 
been  given  in  these  comments  to  the  dangers  of  ill- 
considered  loan  connections  it  may  be  said  that, 
while  perhaps  a  very  large  majority  of  the  persons 
who  are  engaged  in  the  business  are  both  competent 
and  honest,  there  are  at  least  some  who  are  neither, 
and  that  it  is  a  very  easy  matter  for  the  legal  respon- 
sibility of  the  principal  for  the  acts  of  his  agent  to  be 


82  MORTGAGE  LOAN  VALUES 

established.  It  may  also  be  said  that  these  various 
matters  have  been  mentioned  with  some  particularity 
for  the  primary  reason  that  false  views  respecting 
them  will  breed  errors  of  policies  and  practices  that 
may  lessen  the  loan  values  of  the  securities  taken,  and 
for  the  main  reason  that  in  a  legitimate  mortgage  loan 
business  there  is  no  room  for  losses. 


XIV 

CONTRACTS   WITT!    I^ORROWERS — AMOUNT 

There  are  a  numl)er  of  things,  such  as  tlif»  amount 
of  the  loan,  the  time  it  is  to  run,  the  rate  of  interest 
whieh  is  to  he  paid  and  its  other  terms  and  conditions, 
that  are  necessarily  matters  of  contract  between  the 
lender  and  the  borrower ;  and  these  things  should  be 
definitely  determined  and  agreed  upon  before  any 
specific  investigation  of  the  security,  title  or  personal 
hazard  is  entered  into. 

The  lender  is  theoretically  in  a  position  (within  the 
laws  as  to  usury)  to  dictate  his  requirements  in  these 
matters,  but  in  practice  he  will  find  that  his  policy,  to 
be  successful,  must  be  governed  and  modified  by  the 
various  loan  conditions  presented  by  different  classes 
of  securities,  different  conditions  of  territory,  differ- 
ent State  laws,  and  different  loan  competition. 

He  will  also  find  that  the  policy  which  he  adopts  as 
to  one  matter  will  often  indicate  the  policy  that  must 
be  adopted  in  another ;  for  instance,  if  he  demands  an 
unusually  wide  margin  of  security  he  will  find  that  he 
must  be  more  liberal  as  to  time  and  terms  and  interest 
rates ;  if  he  demands  the  maximum  interest  rates  he 
will  find  that  he  can  not  be  so  exacting  in  other  mat- 
ters; and  if  he  adopts  any  policy  which  fails  to  recog- 
nize this  principle  he  will  simply  fail  to  get  a  desirable 
line  of  offerings. 

83 


84  MORTGAGE  LOAN  VALUES 

One  of  tlie  fii'st  jiikI  i)riii('ipal  pi-ovisioiis  of  the  loan 
eontraet  relates  to  tlie  amount  -which  shall  be  loaned 
upon  the  security  offered,  and  the  principal  rule 
adopted  by  the  lender  to  cover  tliis  ])oint  usually  fixes 
a  certain  per  cent,  of  the  market  value  of  the  property 
as  the  maximum  loan  limit ;  sometimes  the  lender  also 
fixes  an  arbitrary  loan  limit  which  he  applies  to  any 
security  or  to  certain  classes  of  pi'o])erty,  independ- 
ently of  the  market  value. 

The  rule  limiting  a  loan  to  an  amount  not  exceeding 
a  certain  percentage  of  the  market  value  of  the  secu- 
rity, presupposes  such  value  to  have  been  accurately 
determined  and  to  possess  a  reasonable  stalnlity.  The 
value  of  the  rule  depends  absolutely  upon  this  founda- 
tion and  when  too  optimistic  views  of  these  matters 
are  accepted,  which  is  often  the  case  when  lenders  are 
either  inexperienced  or  over-anxious  to  obtain  busi- 
ness, the  mistake  will  be  a  fruitful  cause  of  an  unsat- 
isfactory experience  in  the  mortgage  loan  business. 

If  this  danger  is  provided  against,  however,  the 
question  is  then  fairly  upon  the  percentage  of  the 
market  value  which  is  safe  as  a  basis  for  loans,  and 
it  may  be  said  as  to  this  that  the  per  cent,  should  be 
small  enough  to  leave  a  margin  of  value  in  the  prop- 
erty sufficient  to  cover  the  costs  of  a  possible  fore- 
closure and  sale  and  to  provide  for  the  accumulation 
of  interest,  taxes,  insurance  and  other  charges  in  ev3nt 
of  their  payment  being  defaulted  either  before  fore- 
closure or  during  any  period  of  redemption  wliich  may 
be  allowed  by  law.  It  must  also  be  sufficient  to  cover 
any  depreciation  in  the  market  value  of  the  property 
which  is  likely  to  occur  during  the  life  of  the  loan, 


MORTGAGE  LOAN  VALUES  85 

or  which  it  might  suffer  because  of  the  condition  of 
an  enforced  sale. 

This  limit  of  safety  nnder  the  percentage  rule  is 
variously  estimated  by  different  lenders  to  be  from 
forty  per  cent,  of  the  value  of  the  property  by  the 
more  conservative  ones,  to  sixty  per  cent,  by  tlie  more 
liberal  ones;  but  as  a  forty  per  cent,  rule  practically 
shuts  out  a  great  deal  of  good  business  and  sixty  per 
cent,  sometimes  leaves  too  narrow  a  margin  of  value 
above  the  loan,  conservative  lenders  very  generally 
agree  upon  fifty  per  cent,  as  being  more  satisfactory, 
although,  as  the  perishable  improvements  are  more 
apt  to  depreciate,  a  rule  limiting  loans  to  fifty  per 
cent,  of  the  value  of  the  ground,  and  forty  per  cent, 
of  the  value  of  the  improvements,  is  adopted  by  some 
and  is  perhaps  a  safer  one. 

This,  of  course,  refers  to  ordinary  loans  which  are 
subject  to  the  ordinary  conditions  in  other  matters. 
If  the  loan  is  made  for  an  unusually  long  time,  how 
ever,  the  lender  is  apt  to  be  more  conservative  as  to 
the  amount,  while  if  it  is  to  be  made  on  an  amortiza- 
tion plan  he  may  (perhaps  with  less  reason)  be  in- 
clined to  be  more  liberal. 

It  is  a  common  practice  also  for  lenders  and  inves- 
tors to  adopt  arbitrary  rules  as  to  the  maximum  and 
the  minimum  amounts  which  they  will  consider  in 
single  cases.  They  ordinarily  feel  that  it  is  not  a  good 
business  policy  to  place  any  very  large  part  of  their 
funds  in  a  single  loan,  and  so  they  follow  the  homely 
philosophy  of  "not  putting  too  many  eggs  in  one 
basket."  On  the  other  hand  they  realize  that  the  time 
and  money  necessarily  expended  in  making  and  caring 


86  MORTGAGE  LOAN  VALUES 

for  a  small  loan  is  almost,  if  not  (inite,  as  great  as  it  is 
for  a  larger  one,  and  that  proportionately  it  is  always 
greater,  and  there  is,  therefore,  a  miiiitmiin  limit 
below  wliieh  they  cannot  afford  to  go. 

The  policy  W'hich  is  followed  in  these  matters,  how- 
ever, often  depends  upon  circumstances ;  in  some  cases 
it  depends  upon  the  amount  of  loan  funds  which  the 
lender  may  control,  and  in  others  upon  the  ability  of 
his  organization  to  care  for  smaller  details  with 
economy. 

The  rules  above  mentioned  are  often  thought  to 
cover  all  that  is  necessary  in  defining  the  proper  loan 
limits,  but  there  are  cases  of  rather  frequent  occur- 
rence where  the  application  of  these  rules  will  fail  to 
fully  protect  the  interests  of  the  lender ;  for  example, 
the  dependable  average  net  income  producing  capacity 
of  the  property  is  not  always  a  controlling  factor  in 
establishing  its  market  value,  as  is  often  the  case  with 
an  expensive  residence  or  a  farm  which  is  supposed  to 
have  a  "proximity"  value,  and  if  its  present  market 
value  is  based  upon  some  less  stable  foundation  than 
that  of  its  dependable  income,  that  value  may  not 
be  maintained  during  the  life  of  the  loan. 

The  safety  of  the  investor  or  lender,  then,  often 
calls  for  an  arbitrary  rule  that  loans  in  excess  of 
certain  fixed  sums  shall  not  be  made  on  certain 
classes  of  property,  notwithstanding  the  fact  that 
their  present  market  value  is  ample ;  and  such  a  rule 
is  usually  applied  on  an  acreage  basis  to  farm  loans 
and  is  even  more  arbitrarily  applied  to  detached 
dwelling  house  city  loans. 

Such  rules  are  wise  and  useful  only  when  their 


MORTGAGE  LOAN  VALUES  87 

terms  have  been  very  earefnlly  considered  in  connec- 
tion with  the  circumstances  which  may  affect  the 
generality  of  cases,  for  it  is  very  easy  to  make  such 
mistakes  as  that  of  establishing  too  low  a  limit  and 
thus  shutting  out  the  better  offerings,  or  that  of 
adopting  too  high  a  limit  and  thus  inducing  the  con- 
sideration of  offerings  at  valuations  which  are  liased 
upon  temporary  high  prices  or  upon  the  cost  of  the 
property  rather  than  upon  its  average  earnings  or  the 
competition  among  buyers  which  may  be  expected  if  it 
should  be  offered  for  sale. 

None  of  these  rules,  however,  is  intended  to  fix  the 
amount  which,  under  a  given  set  of  facts,  is  always  a 
safe  or  desirable  one  to  be  loaned;  but  on  the  other 
hand  each  is  intended  to  fix  a  limit  above  which,  in 
the  average  case,  a  loan  will  not  be  safe  and  desirable, 
which  is  quite  a  different  thing. 

It  is  the  rule  of  some  investors  (especially  in  the 
matter  of  farm  loans)  that  only  the  producing  parts 
M  the  property  shall  be  considered  and  others  desig- 
nate the  proportion  which  must  show  a  present  income 
value. 

These  rules,  however,  fail  to  recognize  the  fact  that 
the  proportional  relationship  between  income  values 
and  market  values  is  not  alwaj'S  the  same,  and  that 
w^hile  the  income  from  the  producing  parts  of  an  of- 
fering may  be  sufficient  to  justify  a  loan  of  a  certain 
amount,  the  market  value  of  this  part  alone  (which  is 
acceptable  under  such  rule)  may  fail  to  do  so,  or, 
while  the  market  value  of  the  entire  property  may 
be  ample,  the  net  income  from  the  producing  portion 
of  it  may  be  so  reduced  as  to  be  insufficient  if  it  is 


88  MORTGAGE  LOAN  VALUES 

charged  with  the  cost  of  maintenance  of  the  whole 
property. 

A  more  practical  rule  therefore  would  seem  to  he 
that  the  property  as  a  whole  should  be  subjected  to 
each  test,  for  a  portion  of  its  actual  market  value  is 
often  based  upon  the  potential  income  value  of  its 
undeveloped  parts  and  is  entitled  to  consideration 
provided  that  the  developed  income  value  is  sufficient 
to  warrant  the  loan. 

Although  loan  offerings  may  technically  measure 
up  to  the  required  standard,  they  will  often  be  found 
to  contain  certain  features  that  are  not  wholly  unob- 
jectionable; some  doubt  may  be  felt  as  to  the  con- 
tinued popularity  of  the  neighborhood  or  some  defect 
may  exist  which  might  in  time  grow  to  be  a  more 
serious  one,  and  when  such  shortcomings  do  not  seem 
to  be  of  sufficient  importance  to  warrant  the  rejei^tion 
of  the  loan,  and  at  worst,  can  only  operate  to  reduce 
and  not  to  destroy  the  loan  value,  they  may  be  prop- 
erly offset  by  reducing  the  amount  loaned  in  pro- 
portion to  the  importance  of  the  fault.  But  cures  for 
such  defects  should  not  be  sought  through  the  unwise 
remedies  sometimes  resorted  to — of  the  borrower 
agreeing  to  make  future  reductions  in  his  loan,  or  of 
the  lender  reviewing  the  fact  from  a  more  optimistic 
point  of  view^  than  he  at  first  thought  to  be  right  and 
then  making  more  liberal  decisions. 


XV 

CONTRACTS  AS  TO  TIME  OF  MATURITY 

Time  is  also  a  necessary  feature  of  all  loan  eon- 
tracts,  and  the  investor  or  lender  will  find,  as  in  the 
rule  governing  tlie  amount  loaned,  that  his  own  wishes 
cannot  always  arbitrarily  determine  the  policy  which 
he  adopts ;  he  should,  of  course,  consult  his  own  inter- 
ests, but  in  doing  so  he  must  also  give  consideration  to 
certain  loan  conditions  with  which  he  will  be  con- 
fronted. 

All  Real  Estate  mortgages  for  whatever  time  they 
may  be  drawn  are  properly  classed  as  "long  time" 
loans,  and  they  are  seldom  made  for  a  shorter  period 
than  three  years  nor  for  a  longer  one  than  ten  years; 
the  usual  term  being  either  five,  seven  or  ten  years, 
shorter  terms  than  three  years  being  favored  in  locali- 
ties and  on  securities  where  there  is  some  doubt  as  to 
the  permanency  of  values,  and  the  ten  year  terms  in 
sections  and  on  properties  about  which  no  such  doubt 
exists. 

The  question  of  what  is  the  most  desiraljle  length 
of  time  for  which  mortgages  should  run  is  also  some- 
what involved  with  the  fiuestion  of  their  terms,  for 
while  their  full  amount  is  sometimes  made  to  run 
for  the  full  time,  the  contract  is  often  modified  by 
required  or  privileged  prepayment  conditions. 

The  cost  of  a  loan  to  the  l)orrower  is  also  a  matter 
89 


90  ArORTrjAOE  LOAN  VALUES 

of  interest  to  the  lender  wlien  considering  the  time  for 
whieh  it  is  to  be  drawn,  for  altlioufi'h  neitlier  of  these 
things  can  be  expected  to  control  tlie  othei-,  there  is  a 
relation  between  llieiu  wliich,  in  juslice  to  the  bor- 
rower, shonld  be  recogniz(Hl  within  Ihe  l)()unds  of 
safety. 

The  actnal  time  consnmed  and  expense  incnrred 
may,  for  instance,  l)e  as  great  or  even  greater  in  the 
case  of  a  small  loan  as  it  is  in  that  of  a  larger  one, 
but  as  the  service  required  in  the  latter  case  is  usually 
the  more  valuable  it  is  customary  for  this  charge  to 
be  made  upon  a  percentage  basis  with  a  compensating 
rule  that  a  larger  percentage  shall  be  charged  on  the 
smaller  transactions,  l)ut  however  the  expense  may  be 
calculated  and  whatever  form  its  payment  may  take, 
it  adds  its  sum  to  the  cost  of  the  loan  and  for  all  prac- 
tical purposes  may  be  treated  as  a  part  of  the  interest 
paid  by  the  borrower. 

It  is  very  evident  then  that,  figured  upon  this 
basis,  the  expense  charge  grows  proportionately 
smaller  with  each  year  that  is  added  to  the  term  of 
the  loan  and  that  if  the  term  is  too  short  such  a 
charge  may  easily  be  heavier  than  would  seem  to  be 
reasonable.  For  example,  if  the  cost  of  procuring  a 
five  thousand  dollar  loan  should  be  one  hundred  dol- 
lars it  would  add  two  per  cent,  to  the  interest  if  the 
term  was  one  year,  while  it  would  only  add  one-fifth 
of  one  per  cent,  per  annum  to  the  interest  on  a  ten 
year  loan;  and  if,  as  is  the  case  in  some  sections,  the 
loans  are  small  and  the  cost  of  doing  business  is  great, 
the  percentage  chai'ge  on  short  term  loans  will  neces- 
sarily be  such  a  heavy  one  that  they  will  be  burdened 


MORTGAGE  LOAN  VALUES  91 

beyond  reason,  the  only  remedies  being  longer  terms 
or  the  foolish  one  of  elieapened  investigations. 

As  a  general  rule  the  borrower  is  anxious  that  his 
loan  shall  be  written  for  a  loug  period,  provided  he  is 
given  liberal  prepayment  privileges,  and  as  the  in- 
vestor naturally  wishes  to  avoid  the  trouble  and  loss 
incident  to  the  frequent  reinv(^stment  of  his  funds  he 
is  nearly  always  willing  to  concede  as  long  a  term  as 
is  consistent  with  the  safety  of  his  interests. 

In  other  words,  the  borrower  realizes  that  he  may 
need  the  use  of  at  least  a  part  of  the  money  for  a 
comparatively  long  time  and  does  not  wish  to  place 
himself  in  a  position  wlun-e  he  may  be  compelled  to 
repay  the  full  amount  before  a  time  when  he  is  sure 
that  it  will  be  convenient  for  him  to  do  so,  but  he  does 
want  a  contract  that  will  allow  him  to  repay  it  in 
part  or  in  wliolc  l)efore  maturity  if  such  repayment 
becomes  practicable  and  desirable  to  him ;  and  it  has 
become  a  common  practice  of  investors  to  consent  to 
longer  terms  and  to  gi-ant  some  form  of  such  options. 

On  the  other  hand,  it  is  said  with  reason  by  those 
who  do  not  favor  long  terms  that  expert  judges  of 
loan  values  are  usually  able  to  foresee  with  reasonable 
certainty  the  probalnlity  or  improljability  of  any  oc- 
currence in  the  near  future  which  may  affect  the 
value  of  the  security,  but  that  as  the  time  is  extended 
their  ability  to  forecast  its  events  rapidly  diminishes 
and  soon  becomes  negligible,  and  if  loug  terms  are 
granted  there  is  ordinarily  a  greater  danger  that  the 
securities  may  become  impaired  before  the  maturity 
of  the  loans  than  is  the  case  if  they  are  made  for 
shorter  terms. 


92  MORTGAGE  LOAN  VALTIP]S 

It  is  also  said  that  while  the  effect  of  ordinary 
changes  in  the  physical  surroundings  of  property  is 
not  apt  to  be  immediate  and  if  the  property  itself  is 
in  a  good  condition  at  the  time  the  loan  is  made,  it 
will  usually  be  able  to  withstand  neglect  or  misman- 
agement for  a  reasonable  length  of  time  without 
serious  loss.  It  is  also  true  that  favorable  luizards, 
especially  personal  hazards,  may  be  changed  at  any 
time,  and  that  when  any  unfavorable  conditions  do 
come  into  existence  and  reach  a  stage  where  their 
effect  becomes  marked,  the  depreciation  in  the  loan 
value  from  that  time  on  is  nearly  always  a  very  rapid 
one. 

And  again,  it  is  urged  that  the  long  term  contract 
binds  the  investor,  while  under  the  common  plan  of 
granting  prepayment  privileges  it  does  not  so  bind 
the  borrower,  who,  if  prevailing  interest  i-ates  should 
be  lowered,  can  take  advantage  under  sucli  option  to 
secure  a  lower  rate  by  refunding  his  loan,  l)nt  if  inter- 
est rates  should  advance  the  investor  has  no  corre- 
sponding opportunity  to  profit  by  that  fact. 

These  points  seem  to  be  well  taken,  and  therefore, 
while  investors  may  desire,  they  very  generally  fear 
long  terms,  and  stipulations  for  required  prepayments 
and  amortization  plans  are  sometimes  used  for  the 
purpose  of  extending  the  time  for  the  final  payment  of 
the  whole  loan  and  at  the  same  time  modifying  the 
length  of  its  term  as  applied  to  its  full  amount,  in 
the  belief  that  this  plan  will  harmonize  the  interests 
at  stake  as  shown  by  the  various  arguments  for  and 
against  the  policy  of  granting  either  very  long  or  very 
short  loan  terms. 


MORTGAGE  LOAN  VALUES  93 

Theoretically,  this  amortization  plan  is  a  very  at- 
tractive one,  for  with  each  payment  that  is  made  upon 
the  principal  the  security  is  bettered,  and  for  a  cer- 
tain class  of  loans,  especially  loans  on  city  property 
jdelding  a  fixed  and  dependable  income  sufficient  to 
meet  the  required  payments,  such  plans  are  often 
found  to  be  not  only  practical  but  also  very  desirable ; 
but  for  certain  other  classes  of  securities,  especially 
the  ordinary  farm  loans,  they  are  frequently  either 
impractical  or  undesirable,  and  in  all  cases  the  plan 
contains  one  very  dangerous  feature  in  the  fact  that 
it  inclines  the  lender  to  take  a  too  optimistic  view 
of  the  situation. 

It  is  the  proper  habit  of  the  investor's  or  lender's 
mind  to  look  into  the  future  and  to  consider  his  secu- 
rity from  that  angle,  and  if  the  contract  provides  a 
promise  for  its  betterment  in  the  future  he  will  almost 
unconsciously  give  a  certain  weight  to  that  feature, 
when  in  fact  it  is  only  a  promise  and  not  entitled  to 
any  consideration  whatever  as  bettering  the  security 
at  the  time  when  the  loan  is  made. 

Although  there  are  exceptional  cases  when  long 
terms  with  no  required  prepayments  are  unobjection- 
able because  of  a  large  margin  of  security  in  stable 
land  values,  and  a  good  rate  of  interest  without 
unduly  liberal  prepayment  privilege,  a  majority  of 
investors  seem  to  have  agreed  that  in  the  ordinary  city 
and  farm  loan  business  the  weight  of  the  argument  is 
against  either  extreme,  and  that  a  term  of  either  five 
or  seven  years  is  the  most  generally  satisfactory  one, 
five  years  being  preferred  by  the  more  conservative 
who  very  generally  feel  that  if  ten  year  terms  are 


,94  i\iortoa(;e  loan  values 

granted,  a  substantial  repaj^ment  should  be  i-eqiiired 
at  the  end  of  the  five  year  period  as  this  will  afford 
the  investor  an  opportunity  to  prolcct  himself  in  a 
measure  against  the  evils  that  soineliincs  attend  long 
terms,  and  will  be  long  enough  to  answer  the  more 
serious  objections  to  very  short  ones. 

When  some  sueli  plan  as  the  above  is  adopted  the 
investor  is  afforded  a  needed  opportunit}'  to  review 
the  record  of  the  loan,  to  re-examine  the  property,  and 
to  call  in  a  part  of  the  loan  if  there  is  occasion  foi'  do- 
ing so,  or  of  granting  either  in  whole  or  in  part  such 
extensions  as  may  be  asked,  if  the  circumstances  war- 
rant him  in  extending  it. 

It  is  true  that  the  need  of  the  borrower  is  more 
frequently  than  otherwise  for  a  longer  period  than 
five  years,  but  if  he  maintains  a  good  record  for  his 
loan  he  seldom  finds  it  difficult  to  obtain  its  extension 
at  a  moderate  cost  which,  if  divided  by  five,  seven  or 
ten,  as  the  case  may  be,  and  treated  as  an  annual 
expense,  will  usually  seem  to  be  a  trifling  one. 


XVI 

CONTRACTS    AS    TO    PREPAYMENTS,    ETC. 

City  loans  are  very  common  in  which  a  large  pro- 
portion of  the  valne  of  the  property  is  represented  by 
perishable  improvements  that  must  necessarily  depre- 
ciate with  age,  and  in  such  cases  the  plan  of  requiring 
partial  repayments  to  be  made  after  one  or  two  years 
in  sums  that  will  offset  any  such  depreciation  and  in 
sums  that  can  be  realized  from  the  net  income  of  the 
property,  is  no  doubt  a  wise  one,  and  one  which  should 
be  applied  to  all  reasonably  large  city  loans  which 
approach  the  limit  of  fifty  per  cent,  of  the  value  of 
the  security. 

If  moderately  small  city  loans  are  considered,  such 
as  those  on  average  priced  dwellings,  the  probable 
future  depreciation  of  the  property  should  be  dis- 
counted in  the  amount  loaned,  for  if  this  is  not  done, 
and  the  required  pai-tial  repayments  to  cover  this 
depreciation  rest  upon  the  personal  ability  of  tlie  bor- 
rower, or  upon  the  net  revenues  from  the  property 
when  such  revenues  are  not  sufficient  to  justify  tlie 
investor  in  looking  after  them,  this  repayment  plan 
will  often  be  a  source  of  worry  to  the  ordinary  in- 
vestor. 

It  is  no  doubt  true  that  any  plan  requiring  that 
prepayments  be  made  is  often  of  benefit  to  that  class 
of  borrowers  who  are  inclined  to  use  their  money  for 

95 


96  MORTGAGE  LOAN  VALUES 

other  purposes  unless  eonipelled  to  apply  it  upon  their 
debts,  but  the  smaller  loans  in  which  tiiis  is  a  prom- 
inent feature  belong  almost  exclusively  to  such 
financing  as  is  done  by  Building  and  Loan  and  othc'r 
similar  institutions  which  can  make  their  prepayment 
collections  at  such  frequent  intervals  and  in  such 
small  amounts  that  there  is  seldom  any  occasion  for 
waiving  or  extending  them. 

In  the  case  of  farm  loans,  howevei-,  there  are  at 
least  two  very  good  reasons  why  the  required  yearly 
curtailment  plan  is  objectionable. 

First,  while  the  farm  may  produce  a  very  depend- 
able average  annual  revenue  it  cannot  be  depended 
upon  to  produce  a  fixed  annual  revenue.  Too  much 
depends  upon  seasons  and  conditions  that  are  beyond 
human  control,  nor  may  the  bad  effects  of  a  disastrous 
year  be  w^holly  confined  to  a  direct  loss  of  revenue 
from  the  crop  affected. 

For  instance,  if  a  farmer  should  meet  with  a  total 
failure  of  his  corn  crop  he  may  find  added  to  his  loss 
of  expected  revenue  from  this  source  the  necessity  of 
buying  corn  to  feed  his  live  stock,  and  if  a  prepay 
ment  on  his  loan  should  fall  due  in  a  lean  year  he 
might  be  compelled  to  make  sacrifices  or  to  ask  for  its 
extension,  although  his  security  was  above  question. 

Second,  a  large  number  of  the  best  farm  applica- 
tions are  made  for  the  purpose  of  obtaining  money 
to  use  in  making  improvements  to  the  farm  or  its 
equipment,  and  as  returns  on  such  outlays  cannot  be 
expected  for  some  time,  the  farmer  may  not,  mean- 
while, be  able  to  repay  portions  of  his  loan,  although 
by  its  proper  investment  in  barns,  fences,  ditching, 


MORTGAGE  LOAN  VALUES  97 

live  stock,  etc.,  he  may  have  made  himself  much  bet- 
ter able  to  pay  it  in  full  at  maturity.  Under  such 
conditions,  requests  for  waivers  or  extensions  of  credit 
are  frequent  and  the  lender  is  often  compelled  either 
to  grant  these  requests  or  to  foreclose  his  loan,  neither 
of  which  actions  was  a  part  of  his  original  expectation 
and  neither  of  which  is  satisfactory  to  him  from  a 
business  point  of  view. 

Farming  lands  are,  of  course,  subject  to  deprecia- 
tion from  neglect  or  mismanagement,  but  they  are  not 
subject  to  many  of  the  other  conditions  which  may 
depreciate  city  values;  and  when  the  betterment  of 
farm  loans  is  sought  l)y  requiring  annual  prepayments 
to  be  made  it  would  seem  to  be  chiefly  from  an  igno- 
rance of  their  peculiarities  or  an  attempt  to  strengthen 
those  which  may  have  some  questionable  feature  in 
location,  amount,  character,  length  of  term^  stability 
of  value,  or  personal  hazard  that  easts  a  doubt  upon 
their  entire  desirability. 

As  has  been  stated,  it  is  a  very  usual  practice  to 
make  loan  contracts  in  which  an  option  is  granted  the 
borrower  of  repaying  a  part  or  all  of  his  principal 
debt  before  its  maturity  and  this  is  quite  different  in 
most  of  its  effects  from  the  above  mentioned  required 
prepayment  plan. 

There  is,  of  course,  some  difference  in  the  terms  of 
such  options  as  granted  by  different  lenders,  owing 
to  the  difference  of  opinion  among  them  as  to  whether 
a  liberal  or  a  restricted  policy  is  better. 

Occasionally  such  privileges  are  granted  without 
any  restrictions  whatever,  or  with  the  simple  require- 
ment that  prepayments,  if  made,  shall  be  on  interest 


98  M()RT(JA(IE  LOAN  VALUES 

dates,  thus  opeiiing:  a  door  1o  short  t(M-)n  loans  at 
times  wlien  they  are  difficult  to  obtain  through  other 
soui'ccs.  On  the  otlier  hand,  some  lendei'S  refuse  to 
grant  sudi  privilege  for  more  than  a  stated  amount 
each  year,  and  sometimes  they  stipulate  thnt  no  rcpsiy- 
ment  shall  be  made  with  borrowed  money,  ihiis  un- 
necessarily hampering  tlu'  mortgagor  in  the  ronduct 
of  his  affairs. 

It  may  be  said  tluit  there  seems  to  be  little  reason 
or  demand  for  the  more  liberal  of  these  policies,  and 
little,  if  any,  benefit  to  be  had  from  the  very  restricted 
ones;  a  middle  course,  howcA'er,  has  been  found  to  be 
a  desirable  one ;  for  instance,  some  lenders  have  had 
a  very  satisfactory  experience  in  granting  borrowers 
the  option  of  making  any  prepayments  desired  at 
interest  dates  after  the  loan  has  run  for  two  years, 
and  also  to  make  such  payments  at  any  time  prior  to 
two  years  provided  an  amount  equal  to  three  months 
interest  is  paid  for  the  privilege. 

Under  some  such  a  policy  the  investor  may  be  pro- 
tected against  loss  because  of  idle  funds  or  reinvest- 
ment expenses,  and  the  borrower  is  better  able  to  con- 
trol his  affairs  if  he  wishes  to  sell  his  property  or  to 
reduce  his  debt. 

Reasonably  liberal  prepayment  privileges  are  very 
much  desired  by  the  better  class  of  borrowers,  and 
especially  by  the  farmers  and  such  others  as  have 
few  opportunities  of  making  profitable  temporary 
investments,  for  such  an  option  furnishes  them,  in 
effect,  with  a  Savings  Bank  that  is  absolutely  sound, 
but  they  will  seldom  insist  upon  a  degree  of  liberality 
that  would  be  unfair  to  the  investor. 


:\IORTGAGE  LOAN  VALUES  99 

Nor  should  the  investor  proceed  upon  the  mistaken 
theorj'  that  no  favors  can  be  granted  by  him  to  bor- 
rowers Avithout  corresponding  disadvantages  to  him- 
self, for  lie  will  gain  s,);iie  advantage  in  every  case 
where  the  borrower  avails  himself  of  a  reasonable  pre- 
payment option;  not  because  of  any  betterment  that 
is  made  to  the  security  hy  a  reduction  of  the  propor- 
tionate amount  of  the  debt,  for  if  the  loan  has  been 
properly  made  the  security  will  need  no  such  better- 
ment, but  because  of  a  certain  betterment  to  the  moral 
hazard  which  cannot  be  shown  by  any  enforced  pre- 
payment. For  instance,  when  voluntary  prepayments 
have  l)een  made  the  investor  may  feel  more  assured 
that  he  will  have  no  trouble  because  of  defaulted 
interest,  taxes,  or  insurance,  that  the  ultimate  neces- 
sity of  a  foreclosure  has  grown  more  remote,  that  the 
value  of  the  property  is  not  likely  to  depreciate  from 
want  of  care  and  attention  and  that  the  borrower  is, 
to  some  degree  at  least,  prosperous  and  a  good  per- 
sonal  risk;  while  the  required  partial  prepayment 
may  have  l)een  met  by  the  sale  of  stock  or  produce 
before  it  was  ready  for  the  best  market,  or  by  delaying 
needed  repairs  to  the  buildings  or  fences. 

As  a  matter  of  course  prepayment  privileges  in- 
crease the  mortality  of  loans,  and  equally  as  a  matter 
of  course,  the  increase  from  this  cause  is  greater  dur- 
ing a  period  when  interest  rates  are  being  lowered, 
and  less  during  a  period  Avhen  they  are  advancing; 
it  is  also  greater  in  the  better  class  of  loans  and  lower 
in  the  ordinary  or  poorer  class,  and,  as  has  been  noted 
in  another  connection,  the  activity  or  depression  of 


100     MORTGAGE  LOAN  VALUES 

the  Real  Estate  market  also  seems  to  affect  it  to  some 
extent. 

On  the  Avhole,  however,  the  prepayment  of  loans  is 
less  than  is  often  feared  by  the  inexperienced  investor 
who  is  contem])lating  the  granting  of  snch  ])rivileges, 
bnt  what  it  will  be  cannot  be  estimated  in  advance 
with  any  degree  of  certainty  unless  all  of  the  condi- 
tions as  to  territory,  character  of  securities,  and  the 
terms  of  contract  affecting  a  given  collection  of  loans 
could  be  assembled,  and  then  only  as  it  would  be  indi- 
cated b}'  some  former  experience  under  similar  con- 
ditions. A  general  idea,  however,  may  perhaps  be 
formed  from  the  fact  that  under  fairly  liberal  prepay- 
ment options,  and  no  prepayment  requirements,  sev- 
eral millions  of  dollars  in  medium  sized  high  class 
loans,  that  are  about  equally  divided  between  farm 
and  city  loans  and  are  located  in  about  twenty  dif- 
ferent States,  have  shown  an  average  increase  in 
mortality  of  about  ten  per  cent. — that  is,  the  average 
life  of  a  five  year  loan  according  to  this  experience 
has  been  about  four  and  one-half  years  when  the 
final  repayment  of  the  principal  has  not  been  ex- 
tended beyond  the  original  period. 

This  increase  in  mortality,  however,  only  shows  tlie 
comparative  effect  of  such  prepayment  privileges, 
for  the  actual  average  life  of  five  year  loans  with 
their  extensions  is  ahvays  much  longer  than  five 
years,  notwithstanding  the  fact  that  prepayment 
privileges  have  been  granted. 


XVII 

CONTRACTS  AS  TO  INTEREST  RATES,  ETC. 

The  rate  of  interest  that  is  to  be  paid  by  tlie  bor- 
rower is  also  a  necessary  part  of  the  loan  contract 
and,  next  to  the  amount  loaned,  is  probably  the  most 
important  one. 

Preliminary  to  completing  the  loan  contract  with 
the  borrower,  the  lender  determines  upon  and  asks 
for  a  rate  which  he  believes  the  condition  of  the  local 
money  market  will  entitle  him  to  receive  and  which 
will  make  the  loan  a  marketable  one,  and  the  appli- 
cant usually  agrees  to  pay  such  rate  provided  that 
the  security  which  he  has  to  offer  will  not  afford  him 
better  terms  from  other  sources. 

The  investor  very  naturally  desires  to  obtain  as 
high  a  rate  as  possible  and  at  the  same  time  to  main- 
tain the  safety  of  his  invested  capital  and  will  always 
attempt  to  accomplish  both  of  these  objects  although 
in  practice  he  Avill  almost  unavoidably  make  one  of 
them  in  some  degree  secondary  to  the  other. 

His  business  and  that  of  the  lender  must,  of  course, 
show  reasonable  profits  but  if  his  primary  purpose  is 
safety  rather  than  profit,  his  inclination  is  to  make 
his  rate  demand  as  low  as  may  be  necessary  in  order 
to  obtain  the  choicest  securities  and  the  main  question 
with  him  is  not  then  so  much  the  question  of  larger 
or  smaller  profits  as  it  is  that  of  more  or  less  desirable 

101 


102     MORTGAGE  LOAN  VALUES 

securities.  If,  on  tlie  other  liand,  he  is  especially  im- 
pressed hy  the  importance  of  higher  rates  lie  will  be 
inclined  1()  dcinaiid  as  iii<^'h  a  one  as  seems  to  him  In 
be  oI)tainable  on  good  secnrities,  and  the  main  (pics- 
tion  will  cease  to  be  the  nii(|uestioiiable  desirability 
of  the  h)ans  and  rest  more  npoii  llie  I'alc  that  is  obtain- 
able on  those  which  may  appear  to  him  to  be  safe. 

This  difference  between  the  maximum  and  the 
minimum  rate  asked,  as  such  demand  uuiy  be  influ- 
enced by  the  above  views,  is  usually  that  of  one  per 
cent,  of  interest,  l)ut  it  is  sometimes  more  or  less  than 
this  if  the  investor  holds  extreme  views  as  to  the 
greater  or  lesser  importance  of  one  of  his  objects. 

The  rental  value  of  money  on  mortgage  securities 
iu  any  territory  primarily  depends,  as  does  the  price 
of  commodities,  upon  its  supply  eompai-ed  with  the 
demand  that  there  may  be  for  its  use,  the  demand 
generally  representing  some  form  or  degree  of  Real 
Estate  development  or  the  refunding  of  old  loans,  and 
the  supply  of  money  for  this  purpose  usually  being 
more  or  less  plentiful  according  to  the  known  stability 
of  Real  Estate  values  in  that  section. 

These  local  rates  also  vary  somewhat  in  each  section 
owing  to  the  relative  desirability  and  size  of  the  loans 
offered,  the  minimum  rate  being  granted  to  large  or 
medium  sized  loans  on  the  best  class  of  property  with 
wide  margins  of  security  and  desirable  personal  haz- 
ards, and  a  higher  rate  being  charged  when  any  of 
these  features  are  not  so  attractive. 

The  factor  of  time  also  enters  into  the  question  of 
local  rates  and  as  the  shorter  term  mortgage  loans 
are  not  so  generally  attractive  to  investors  they  often 


MORTGAGE  LOAN  VALUES      103 

command  a  somewhat  lii<i'lu'r  rate  than  do  those  that 
run  for  a  h)nger  period,  sneh  mortfjages  being  fre- 
quently taken  hy  kx-al  banlvs,  not  as  investments,  but 
for  the  purpose  of  strengthening  weak  personal  haz- 
ards. 

It  must  not  be  uiuh'rstood,  however,  that  these  com- 
ments on  interest  rates  are  intended  to  extend  in  any 
manner  to  that  chiss  of  loans  commonly  known  as 
"short  time"  loans,  for  these  are  usually  based  upon 
the  pledging  of  stocks,  bonds,  chattels  or  personal 
obligations.  They  are  usually  made  with  funds  the 
owners  of  which  desire  to  turn  frequently  oi*  to  keep 
as  nearly  as  possible  available  for  other  uses,  and 
they  usually  command  rates  which  are  very  sensitive 
to  changing  conditions  for  the  reason  that  this  is 
also  true  of  the  market  for  the  securities  upon  which 
they  are  made,  and  there  is  no  occasion  for  mention- 
ing this  class  of  loans  here  except  for  the  purpose  of 
calling  attention  to  the  faet  that  the  rates  which  they 
command  are  Inised  upon  a  different  set  of  facts  than 
those  upon  which  mortgage  investment  rates  are  based 
and  for  the  reason  that  investors  sometimes  make  the 
mistake  of  supposing  that  the  reported  rate  in  a  given 
locality  is  necessarily  the  rate  at  which  high  class 
Real  Estate  loans  can  be  made. 

This  discussion,  on  the  contrary,  is  intended  to  be 
confined  to  interest  rates  upon  the  ordinary  Real 
Estate  loans  which  are  made  wholly  and  exclusively 
upon  the  security  afforded  by  fii'st  mortgages  on  the 
classes  of  property  which  have  been  mentioned  as 
being  the  most  generally  desirable  for  that  purpose; 
and  these  loans,  being  made  with  funds  the  owners 


104     MORTGAGE  LOAN  VALUES 

of  which  dosiro  to  koep  invested  as  permanently  as 
possible,  and  being  based  npon  values  that  ai-e  lu'lieved 
to  be  very  stable,  are  written  at  rates  whicli  arc  not 
inclined  to  yield  except  under  strong  or  long  continued 
pressure ;  the  non-liciuid  character  of  the  loans  tending 
to  keep  the  rate  up,  while  the  stability  of  the  security 
tends  to  keep  it  down;  thus  any  variation  from  the 
standard  rate  on  such  mortgages  in  any  locality  is  apt 
to  be  due  chiefly  to  differences  in  the  desirability  of 
the  individual  loans. 

A  very  common  as  well  as  a  very  serious  mistake 
which  inexperienced  investors  make  is  in  demanding 
a  higher  rate  than  the  one  that  is  generally  accepted 
on  the  standard  securities  of  the  territory,  for  such  a 
demand  always  tends  to  drive  away  the  better  class  of 
borrowers  w'ho  can  get  accommodations  elsewhere  and 
serves  to  attract  the  less  desirable  class  who  find  it 
difficult  to  get  accommodated  anywhere. 

Such  mistakes  are  often  made  by  those  who  have 
no  wish  for  undue  profits  at  the  expense  of  safety, 
but  who  have  been  misled  by  quotations  of  the  rates 
obtainable  in  sections  where  they  are  not  personally 
well  posted  as  to  the  facts.  The  statement  that  a 
certain  rate  of  interest  is  paid  by  the  borrowers  in  a 
given  territory  may  be,  and  indeed  often  is,  accepted 
b}^  them  at  its  face  value  and,  in  a  sense,  the  statement 
may  be  correct,  but  from  a  practical  loan  point  of 
view  the  securit}^  itself  needs  to  be  explained;  the 
territory  may  have  faults  which  prevent  its  considera- 
tion on  ordinary  terms  by  other  investors,  the  rates 
whicli  are  quoted  may  be  those  which  are  paid  only 


MORTGAGE  LOAN  VALUP]S  105 

on  the  more  imdcsirable  loans  or  they  may  oven  he 
the  rates  charged  for  short  time  loans. 

"While  investors  in  Real  Estate  loans  very  *>'(Mierally 
wish  to  confine  their  business  to  standard  s  'curities 
at  the  best  rate  which  they  can  obtain,  they  will  oc- 
casionally go  into  a  section  at  a  lower  rate  tlian  has 
been  customary  there,  with  the  idea  that  by  so  doing 
they  can  promptly  secure  a  large  share  of  the  busi- 
ness of  that  territory,  but  in  practice  this  plan  seldom 
works  satisfactorily,  for  the  Real  Estate  loan  l)usi- 
ness  cannot  be  stimulated  to  any  extent  by  lowering 
interest  rates,  and  if  other  lenders  meet  the  com- 
petition, "Nvhich  they  are  very  apt  to  do,  the  cut-rate 
investor  soon  finds  himself  with  no  more  and  no 
better  business  than  he  might  have  had  at  the  regular 
rate;  for  if  he  can  establish  a  reputation  for  prompt 
action,  fair  dealing,  favorable  terms,  and  reasonable 
expense  charges,  such  reputation  will  usually  enable 
him  to  get  and  hold  a  good  amount  and  good  class  of 
business  at  the  full  standard  rate. 

On  the  other  hand,  investors  sometimes  hold  to 
the  opinion  that  the  ol)tainable  rate  is  largely  a  mat- 
ter of  the  asking,  but  tliis  view  is  as  far  wrong  as  is 
the  one  that  would  expect  to  create  business  by  low- 
ering rates  that  are  already  reasonable  and  competi- 
tive; and  an  attempt  to  force  either  idea  into  the  loan 
business  will  only  end  in  disappointment. 

The  better  class  of  borrowers,  even  the  farmers  who 
are  remote  from  money  centers,  are  usually  as  well 
informed  as  to  the  current  rates  of  interest  in  their 
localities  as  they  are  on  the  market  price  of  any  com- 


106     MORTGA(JE  LOAN  VALUES 

moditirs  wliicli  tlipy  may  desire  eitlier  to  bny  or  sell, 
and  with  few  exceptions  the  price  ]iaid  by  them  for 
the  nse  of  money  will  be  found  to  indicate  tlie  true 
loan  value  of  their  securities  as  surely  as  that  the 
price  paid  for  the  purchase  of  property  indicates  its 
market  value. 

There  are  sometimes  exceptions  to  this  rule  but 
when  one  is  found  it  suggests  the  possibility  of  unde- 
sirable conditions  existing  along  other  lines,  such,  for 
instance,  as  the  personal  hazard,  and  for  this  reason 
these  cases  should  be  given  a  very  careful  scrutiny 
before  they  are  accepted  as  genuine  exceptions. 


XVIII 

MODERATION  IN  THE  DEMANDS  OF  THE  MORTGAGEES 

Certain  facts,  which  counsel  moderation  in  interest 
demands,  lie  upon  the  surface  and  are  patent  to  all 
investors  and  lenders. 

It  is  true,  for  instance,  that  a  section  of  territory 
which  measures  up  to  a  high  standard  of  excellence 
from  a  loan  point  of  view  usually  enjoys  a  low  interest 
rate  and  vice  versa. 

It  is  true  that  the  minimum  local  rate,  whatever 
that  rate  may  be  in  any  given  territory,  applies  to 
such  individual  offerings  as  measure  up  to  a  certain 
required  -standard,  and  that  those  which  do  not  so 
measure  up  pay  a  higher  rate. 

It  is  true  that  a  fairly  large  number  of  the  obtain- 
able loans  in  any  locality  w^ill  be  classed  as  undesir- 
able by  any  expert  in  such  matters  and  will  not  be 
wanted  by  the  more  conservative  investors. 

There  is  another  fact,  however,  which  is  as  true  and 
as  well  known  but  which,  unfortunately  for  the  inex- 
perienced investor,  contains  a  suggestion  of  ];)rofits  to 
be  made  by  waiving  the  more  conserA'ative  rules ;  it  is 
the  fact  that  many  loan  offerings  may  not  be  classed 
as  Avholly  satisfactory  but,  nevertheless,  cannot  be  said 
to  be  affirmatively  bad,  and  that  a  seasoned  investor 
by  a  wise  and  careful  selection  of  such  securities  may 
be  able  to  stay  within  the  bounds  of  safety  on  the 

107 


108     MORTGAGE  LOAN  VALUES 

limited  nnraber  of  tliese  loans  to  Avhirli  lie  vnn  trivo  a 
close  personal  investigation. 

It  is  safe  to  say  that  few,  if  any,  investors  cvci-  ])ur- 
posely  allow  their  desire  for  larger  profits  to  carry 
them  beyond  the  limits  of  safety  in  selecting  their 
securities,  but  it  is  also  true  that  many,  who  are  influ- 
enced by  the  above  mentioned  fact,  unintentionally  do 
so.  There  is  no  lack  of  arguments  bj'  which  the  un- 
wary and  inexperienced  investor  who  has  too  much 
confidence  in  his  owm  ability  to  discovei-  exceptions  to 
the  general  rules,  or  the  greed}'  one  who  looks  with  too 
much  favor  upon  high  interest  rates,  is  enabled  to 
convince  himself  that  he  can  ignore  the  more  conserva- 
tive rules  of  lending  without  danger  of  loss. 

The  poorer  class  of  loans  will  not  only  yield  a 
higher  rate  of  interest  to  the  investor  but  they  will 
also  pay  more  liberal  commissions  to  the  agent  who 
negotiates  them,  and  for  this  reason  every  ' '  doubtful ' ' 
section  where  the  people  wish  to  borrow  money,  and 
every  questionable  loan  from  W'hatever  section  it  may 
come,  may  be  expected  to  have  enthusiastic  advocates 
who  will  declare  it  to  be  as  good  as  any  and  who  will 
enlarge  upon  every  favorable  feature  it  may  have  and 
will  depreciate  every  objectionable  one. 

Cases  will  sometimes  be  presented,  of  course,  which 
are  so  worthless  from  a  loan  point  of  view  that  no 
convincing  argument  can  be  offered  in  their  favor, 
but  if  they  are  simply  questionable  cases  they  will 
often  be  supported  so  skillfully  as  to  deceive  the 
unwary  and  unseasoned  investor,  for  any  undue 
anxiety  on  his  part  to  secure  a  high  interest   rate 


MORTGAGE  LOAN  VALUES      109 

will  encourage  liiin  to  listen  with  a  friendly  ear  to 
sneli  advocacy. 

The  investor  sometimes  refers  with  pride  to  the  fact 
that  he  has  secured  higher  rates  than  have  his  com- 
petitors, but  this  is  apt  to  be  more  a  matter  for  con- 
cern than  for  congratulation.  While  there  are  oc- 
casions, such  as  the  temporary  withdrawal  of  invest- 
ment funds  because  of  some  general  disturbance  of 
ordinary  conditions,  wlien  he  can  favor  his  interest 
receipts  without  treading  upon  dangerous  ground,  it 
may  be  accepted  as  a  sound  conclusion  that,  in  the 
regular  course  of  the  business  and  under  normal  con- 
ditions, he  who  finds  a  rate  which  is  alcove  the  market 
or  who  imposes  harsh  terms  or  heavy  expense  charges 
and  commissions  in  an  effort  to  increase  his  earnings 
will  get,  on  the  whole,  a  poorer  class  of  offerings  than 
will  tlie  person  who  is  content  with  more  moderate 
profits  and  who  is  willing  to  grant  more  favorable 
terms. 

A  case  in  point  occurred  when  a  certain  small  insur- 
ance company,  desiring  to  liquidate,  offered  to  sell 
their  mortgage  securities;  these  were  about  sixty  in 
number  and  one  hundred  and  forty  thousand  dollars 
in  aggregate  amount  (running  fairly  even  as  to  the 
individual  amounts),  approximately  two-thirds  of 
these  loans  had  been  written  at  the  then  standard  rate 
of  five  per  cent,  and  the  others  at  five  and  one-half 
and  six  per  cent,  rates.  In  order  to  induce  purchasers 
the  company  offered  to  sell  all  or  any  of  them  on  a 
six  per  cent,  basis. 

A  buj'er  had  the  Real  Estate  examined  by  three 
competent    appraisers;    these    appraisers    were    told 


no  MORTGAGE  LOAN  VALUES 

iiolli'm^'  and  knew  ii<»ll)iii<]j  as  lo  llic  amoniit,  rate  or 
tornis  of  any  of  the  loans;  their  valuations  were  favor- 
able as  to  approximately  eighty  pei-  cent,  and  unfavor- 
able as  to  tAventy  per  cent,  of  the  securities,  and  a 
further  examination  of  their  report  showed  that  prac- 
tically all  of  those  which  had  been  written  at  five  per 
cent,  had  been  reconnncnded  and  that  over  half  of 
those  which  had  been  written  at  a  higher  rate  had 
been  rejected ;  thus  showing  that  the  lending  com- 
pany, while  securing  a)i  average  of  about  one-fourth 
of  one  per  cent  above  the  standard  rate  on  the  whole 
amount  of  their  investments,  liad  acquired  twenty 
per  cent  of  unsalable  (although  perhaps  not  positively 
bad)  securities. 

It  is  not  an  uncommon  failing,  though  few  will 
acknowledge  it  as  their  own,  to  seize  the  immediate 
advantage  even  at  a  risk  to  the  ultimate  object,  and 
the  evil  of  this  tendency  when  alloAved  to  find  ]ilace 
in  the  investment  business  is  great,  because  in  many 
cases  no  loss  will  occur  and  in  each  case  where  no 
loss  occurs  there  is  encouragement  for  further  liber- 
ality. The  inclination  to  overvalue  good  qualities  and 
to  minimize  defects  grows;  after  each  fortunate  expe- 
rience, real  loan  faults  seem  to  be  of  a  less  serious 
nature ;  and,  when  they  are  contingent  on  future  hap- 
penings, such  happening  in  the  particular  case  under 
consideration  seems  to  be  unlikely,  although  expe- 
rience may  show  that  in  the  average  case  its  occur- 
rence is  probable. 

In  this  attitude  of  mind  the  investor  is  apt  to 
accept  promises  of  future  betterments  Avithout  ques- 
tion, and  to  conclude  that  under  ordinary  circum- 


MORTGAGE  LOAN  VALUES      111 

stances  a  loss  would  bo  improl)aI)le,  that  in  any  event 
it  wonld  1)0  inconsiderable,  and  that  a  small  loss,  if 
it  slioiild  occur  in  one  loan,  would  bo  more  than  offset 
l)y  the  excess  of  interest  received  on  many. 

Somewhere  along  the  above  line  of  action  and  argu- 
ment he,  of  course,  leaves  the  field  of  investment  and 
enters  the  field  of  speculation,  and  if  he  suffers  no 
losses  he  soon  becomes  confirmed  in  these  views  and 
regards  himself  as  an  expert  judge  of  such  invest- 
ments. His  doubts  come  later  when  he  attempts  more 
extensive  operations,  for  he  then  begins  to  realize 
more  clearly  that  yielding  to  the  temptations  of  more 
than  ordinary  profits  most  certainly  means  a  depar- 
ture from  the  more  reliable  class  of  securities.  He 
finds  the  maintenance  of  an  interest  rate  which  is 
above  the  market  to  be  a  difficult  and  dangerous  un- 
dertaking, bringing  him  into  contact  with  more  doubt- 
ful loans,  more  faulty  titles,  more  olijectionable  moral 
and  personal  hazards,  more  misrepresentations  of 
facts  and  concealment  of  adverse  conditions  than 
would  otherwise  be  the  case ;  and  he  finds  that  he  who 
is  able  to  steer  his  financial  boat  clear  of  these  rocks 
must  not  only  be  very  clever  indeed  but  must  also  be 
very  fortunate  if  he  escapes  loss.  But  even  though 
he  should  accomplish  this,  he  finds  that  his  gross  ad- 
vantage is  materially  lessened  because  the  excess  in 
interest  must  be  charged  with  the  cost  of  an  increased 
number  of  fruitless  investigations  and  with  the  loss  of 
interest  suffered  by  reason  of  funds  lying  idle  for 
want  of  sufficient  satisfactory  securities  at  the  higher 
rate. 


XIX 

MINOR   MATTERS   OF   LOAN    CONTRACTS 

There  are  certain  other  matters  whieli  will  become 
parts  of  the  loan  contract  when  it  is  made,  and, 
although  in  a  way  they  are  of  minor-  importance,  their 
careful  consideration  is,  in  no  sense,  unimportant,  for 
there  will  be  occasions  when  the  interests  of  the  parties 
will  be  affected  by  the  policies  which  are  adopted  con- 
cerning them. 

One  of  these  matters  relates  to  the  payment  of  inter- 
est, the  question  being  whether  it  should  be  made 
payable  annually  or  semi-annually  and  whether  its 
due  date  should  be  arbitrarily  fixed  or  should  be  al- 
lowed to  follow  the  date  of  the  loan. . 

The  proper  answer  to  each  part  of  this  question 
seems  to  be  based  upon  the  same  principle — i.  e.,  that 
the  ordinary  income  from  the  property  should  be 
expected  to  meet  the  interest  charges  when  due. 

The  avoidance  of  defaults  is  the  nuiin  object  to  be 
sought  for,  and  it  will  be  found  that  this  can  be  better 
accomplished  under  certain  conditions  by  adopting  a 
rule  requiring  semi-annual  payments  and  under  other 
conditions  by  a  rule  requiring  annual  payments. 

On  city  loans  generally  and  on  farm  loans  in  sec- 
tions where  crops  are  diversified  and  marketable 
throughout  the  year,  semi-annual  interest  is  prefer- 
able, for  aside  from  affording  the  investor  a  slightly 

112 


MORTGAGE  LOAN  VALUES      113 

better  return  in  the  difference  betwe(^n  the  nominal 
and  the  effective  rate,  it  also  enables  him  to  keep  in  a 
closer  toncli  witli  his  interest  collections  and  witli  any 
chano'ing  conditions  in  the  moral  hazard. 

When  the  income  from  the  propertj^  is  a  steady  one 
it  makes  little  difference  to  the  borrower  when  his 
interest  payments  may  become  due,  but  it  is  usually 
easier  for  him  to  meet  semi-annual  payments  because 
they  are  smaller,  and  in  such  eases  there  are,  without 
doubt,  fewer  defaults  under  a  rule  requiring  them  to 
be  so  made. 

On  the  other  hand,  in  those  cases  where  the  income 
from  the  mortgaged  property  is  an  annual  one,  such 
as  a  farm  from  which  the  principal  "money  crop"  is 
marketed  but  once  a  year,  the  requirement  of  semi- 
annual interest  payments  will  often  woi-k  a  hardship 
upon  the  borrower  and  will  frequently  be  the  cause 
of  defaults,  for  the  reason  that  at  least  one  of  the 
interest  due  dates  will  come  at  a  time  when  tliere  is 
no  income  from  the  property  with  which  to  meet  it, 
and  probably  also  at  the  time  of  the  borrower 's  great- 
est expense  in  conducting  his  business. 

Accommodating  the  date  of  the  borrower's  interest 
payments  to  the  date  of  his  income  receipts  will  there- 
fore lessen  the  danger  of  defaults,  and  in  those  cases 
where  the  income  is  an  annual  one  it  is  also  perhaps 
the  best  practice  to  fix  an  arbitrarj^  interest  due 
date  to  come  at  the  most  promising  time  for  its  prompt 
payment,  although  this  will  of  course  make  it  neces- 
sary in  many  instances  to  vary  from  a  strict  uniform- 
ity in  the  time  and  amounts  of  the  interest  coupons. 

It  would  seem  then  that  the  interests  of  neither  the 


114  M()KT(JAOE  L()A\  VALUES 

investor  nor  the  l)orrower  Avill  he  served  by  the  adop 
tion  of  a  fixed  nile  to  he  applied  in  all  eases,  hut  that 
the  interests  of  hoth  will  he  served  hy  a  iMile  that  in 
eaeh  ease  the  requirements  shall  he  made  to  fit  the 
conditions. 


Another  matter  whieli  may  hecome  a  part  of  the 
loan  contract  and  should  he  previously  considered  is 
that  of  fire  insurance. 

•  If  buildings  are  a  part  of  the  Real  Estate  mort- 
ga'^ed  and  are  insurable,  it  is  always  desirable,  as 
bettering-  the  moral  hazard,  that  they  should  be  kept 
insured  whether  or  not  the  land  value  alone  is  suffi- 
cient to  cover  the  physical  hazard. 

If,  however,  the  land  value  is  not  sufficient  in 
itself  for  the  protection  of  the  mortgagee  and  the 
buildings  thereon  are  taken  as  a  part  of  the  physical 
security,  it  is  not  only  desirable  but  is  then  very 
necessary  that  they  should  be  kept  insured  during  the 
life  of  the  loan  in  a  proper  amount,  written  by  a 
responsible  company,  and  that  the  policy  should  be 
assigned  to  the  mortgagee  "as  his  interest  may 
appear,"  and  it  is  usual  in  such  cases  for  the  loan 
contract  to  provide  for  this. 

The  main  questions  to  be  decided  in  this  matter  are 
first  as  to  the  amount  of  insurance  w^hich  should  be 
demanded,  and  second,  as  to  what  rule  should  govern 
the  acceptability  of  insurance*  companies. 

As  to  the  first  of  these  questions,  the  only  matter 
that  can  be  profitably  considered  here  is  how  to  de- 
termine what  is  the  minimum  amount  which  the  mort- 


^MORTGAGE  LOAN  VALUES  115 

g:agop  can  in  any  case  accept  with  safety;  and  the  best 
rule  for  detei-miiiing  this  seems  to  be  that  it  should 
be  in  a  sum  that  is  at  least  equal  to  the  amount  of 
the  loan  less  one-half  of  the  ground  value. 

When  this  rule  is  adopted  it  will  be  evident  that  if 
there  is  a  loss  and  the  insurance  is  collected  and 
applied  in  reducing  the  debt,  the  remaining  unpaid 
portion  (aside  from  defaults)  will  be  equal  to  only 
one-half  of  the  value  of  the  remaining  security,  and 
the  loan  will  still  be  Avithin  the  fifty  per  cent  rule. 

As  to  the  question  of  the  acceptability  of  the  insur- 
ance companies,  it  may  be  said  that  the  mortgagee 
will,  of  course,  very  properly  insist  that  they  shall 
be  financially  sound  and  of  a  good  reputation  for 
fair  dealing.  He  will  usually  require  that  they  shall 
be  regular  stock  companies  and  will  ol)ject  to  mutual 
or  local  assessment  companies  on  the  ground  that  they 
are  generally  of  inferior  financial  standing  and  incon- 
venient to  keep  in  touch  with  and  that  the  validity  of 
the  assignments  of  their  policies  without  the  assignee 
incurring  a  contingent  liability  is  also  often  open  to 
question. 

Lenders  sometimes  act  as  the  agents  for  insurance 
companies  and  are  then  tempted  to  adopt  the  ques- 
tionable practice  of  demanding,  instead  of  soliciting, 
the  business  of  writing  the  necessary  policies  for  their 
borrowers. 

From  a  loan  point  of  view  this  practice  seems  to 
be  faulty  inasniuch  as  it  tends  to  create  an  unfriendly 
feeling  in  tliose  borrowers  who  believe  tliat  they  have 
a  right  to  place  their  insurance  elsewhere  and  have 
good  reasons  for  desiring  to  do  so.     They  are  willing 


116  .MOKT(JACE  LOAN  VALUES 

to  do  whatever  maj'  be  necessary  in  order  to  make 
their  security  good,  but  they  know  tliat  there  ai-e 
iiumy  companies  against  wliich  no  legitimate  objec- 
tions can  be  urged  and  whose  policies  would  afford  as 
full  protection  to  the  mortgagee  as  would  those  of  his 
own  agency,  and  they  regard  his  action  as  that  of 
going  outside  of  any  just  requirements  for  the  pur- 
pose of  securing  a  little  extra  profit  on  the  side. 

Other  matters  which  are  commonly  made  parts  of 
the  loan  agreement,  such  as  the  borrower's  liability 
for  certain  agreed  expenses,  his  obligation  to  furnish 
a  satisfactory  abstract  of  title  with  its  necessary  con- 
tinuations, and  to  furnish  evidence  from  time  to  time 
during  the  life  of  the  loan  of  the  payment  of  taxes  and 
other  liens  having  priority  rights,  require  no  special 
comment  and  may  be  dismissed  with  the  remark  that 
their  terms,  as  well  as  those  of  all  other  agreements, 
should  be  reasonable,  well  understood  and  clearly 
stated  in  the  contract. 


XX 

QUALIFICATIONS    OF    INSPECTORS 

When  an  application  for  a  loan  upon  Real  Estate 
is  submitted  to  a  lender  or  investor  and  is  fomid  to 
comply  with  his  requirements  as  to  tlie  various  matters 
which  have  been  referred  to  in  these  comments,  there 
will  still  remain  two  most  vital  questions  which  must 
be  fully  investigated  by  some  competent  person  in 
his  behalf  before  he  can  reach  an  intelligent  final 
decision  for  or  against  making  any  loan. 

One  of  these  questions  relates  to  the  actual  value 
of  the  property  /or  mortgage  loan  purposes,  and  the 
other  to  the  legal  value  of  the  title  in  the  applicant  for 
such  purposes,  for  it  must  be  remembered  that 
although  the  present  market  value  of  the  Real  Estate 
may  exceed  an  amount  necessary  to  justify  the  loan, 
it  may  nevertheless  lack  dependable  evidence  of  stabil- 
ity, and  that  while  the  applicant  may  have  a  good 
prescriptive  title  that  will  enable  him  to  hold  the 
property  in  his  possession,  such  title  may  not  be  suf- 
ficient of  record  to  insui-e  the  safety  of  a  mortgagee's 
interests. 

It  is  customarj^  for  the  loan  value  of  the  Real  Estate 
to  be  determined  in  advance  of  the  title  investigation, 
the  main  reasons  being  that  findings  as  to  loan  values 
are  apt  to  be  based  upon  a  greater  variety  of  facts 
than  are  findings  as  to  title  values  and  that  any  faults 

117 


UNBALANCED    VALUES 


118 


MORTGAGE  LOAN  VALUES      119 

wliich  may  be  found  in  tlie  physical  sccniity  are  less 
likely  to  be  curable  ones. 

The  question  as  to  whom  this  work  of  determiniufy 
loan  values  shall  be  intrusted  is  a  matter  of  p:rave 
concern  to  the  investor.  This  person  should,  of 
course,  be  both  honest  and  competent,  but  his  qualifi- 
cations should  go  beyond  what  is  embraced  in  the 
ordinary  use  of  these  terms;  his  honesty  should  be  of 
that  quality  which  extends  to  an  al)solute  thorovp-li- 
ness  in  his  work  and  his  competency  should  in-lud^ 
a  loiowledjje  of  all  of  the  conditions  which  make  and 
maintain  values  in  the  class  of  ])roperty  and  the  terri- 
tory that  are  to  be  investifrated. 

It  would  be  useless  to  attempt  to  enumerate  tbe 
various  things  which  the  inspector  should  know  in 
order  to  be  efficient  in  his  work,  for  not  only  the  class 
of  property,  but  the  territory  Avill  have  its  special 
requirements  in  these  matters. 

It  may  be  said,  however,  that  in  all  cases  his  laiowl- 
edge  should  cover  a  wide  range  of  facts  that  it 
should  be  dependable  and  that  above  all  else  it  should 
be  of  a  practical  nature. 

He  should,  for  instance,  understand  the  use  and 
importance  of  the  public  records  and  approved  plats 
in  the  work  of  locating  and  identifying  property. 

He  should  have  a  fair  idea  of  the  approximate  cost 
of  each  of  the  various  kinds  of  construction,  of  its 
yearly  depreciation  and  its  yearly  cost  for  mainte- 
nance, of  its  suitability  to  its  location  and  the  proper 
balance  between  its  ground  and  its  building  values. 

He  should  have  a  good  eye  for  details,  and  an  ap- 
preciation of  their  relative  importance  and  of  their 


120  ]\IORTGAGE  LOAN  VALUES 

relation  to  the  principal  questions  under  considera- 
tion. 

His  information  does  not  necessarily  need  to  be  so 
complete  as  to  qualify  him  as  an  expert  in  each  and 
every  minor  matter,  but  it  should  ])e  sufficient  in 
these  minor  matters  to  enable  him  to  avoid  any  serious 
mistakes  in  the  main  matters  of  which  they  are  parts. 
For  example,  he  may  not  have  a  working  knowledge 
of  any  of  the  building  trades,  but  in  examining  a  city 
building  of  which  any  one  can  see  the  size,  material, 
style,  and  equipment,  the  competent  inspector  will  also 
see  those  little  things  whicli,  although  each  is  a  com- 
paratively small  part  of  the  whole,  tell  the  true  story 
of  the  general  character  of  the  construction,  and 
especiallj^  of  those  parts  which  are  hidden.  His 
trained  eye  will  not  only  observe  the  completed  build- 
ing but  will  also  take  note  of  its  window  glass,  its 
hardware,  its  painting,  its  plumbing,  its  floors,  its 
finish,  its  foundation,  and  its  roof,  and  perhaps  many 
other  things  which  will  indicate  its  relative  cost  and 
character,  and,  knowing  something  about  each  of 
these  things,  he  will  not  be  open  to  any  considerable 
deception  as  to  the  cost  of  the  whole  and  will  be  able 
to  serve  the  mortgagee  as  well  as  if  he  possessed  the 
skill  of  an  expert  builder. 

Neither  is  it  necessary  that  the  farm  inspector 
should  be  a  soil  expert. 

In  surveys  which  cover  less  than  one-fifth  of  the 
total  agricultural  area  of  the  United  States  there  have 
been  found  to  be  more  than  seven  hundred  different 
types  of  soil  and  for  the  farm  inspector  to  attempt  a 
detailed  study  of  them  would  be  impractical. 


MORTGAGE  LOAN  VALUES      121 

But  there  are  many  lliiii^i's  al)out  the  soil  that  he 
must  know;  he  must  be  i\h\e  to  read  the  signs  of  its 
fertilit}'  as  shown  by  i!s  (•oh;)r  and  texture  and  normal 
water  content  and  liy  its  native  growth  of  trees  and 
grasses. 

He  will  not  neglect  to  note  its  workable  qualities,  its 
sub-soil,  its  drainage,  its  topography,  its  tendency  to 
erosions,  its  liability'  to  overflows,  and  its  present 
state  of  cultivation,  and  will  be  able  to  arrive  at  very 
correct,  practical  conclusions  as  to  its  agricultural 
value  although  he  may  be  unable  to  classify  it  by  its 
finer  distinctions. 

He  should  be  able  to  distinguish  between  profitable 
and  unprofitable  methods  of  farming,  and  should 
know  something  about  the  conservation  of  the  soil  and 
of  practical  methods  of  reclaiming  worn  lands,  for 
otherwise  he  will  often  be  unable  to  judge  intelligently 
of  the  likelihood  of  future  improvement  or  deprecia- 
tion. 

He  should  know  something  aliout  the  systems  of 
land  measurements  and  divisions  in  use  in  the  terri- 
tory in  which  his  inspections  are  made,  and  it  is  es- 
pecially important  that  he  should  have  a  good  eye  for 
distances  and  be  able  to  estimate  areas  with  approx- 
imate accuracy. 

If  he  makes  inspections  in  a  section  where  the  soil 
is  liable  to  erosions,  he  should  be  able  to  judge  of  the 
efficacy  of  the  terracing  and  otlier  metliods  of  preven- 
'tion  which  may  be  used. 

In  an  irrigated  section  lie  should  understand  the 
different  w^ays  of  measuring  water  and  the  approxi- 


122     MORTGAGE  LOAN  VALUES 

mate  amonnts  noeded  for  ajyri cultural  purposes  under 
the  various  soil  and  erop  condilions. 

In  a  "one  crop"  section  ])e  should  understand  the 
evil  effect  which  this  condition  is  apt  to  impose  on 
the  general  market  and  he  al)le  to  recognize  intelligent 
neighborhood  efforts  to  overcome  it. 

The  various  tilings  which  the  expert  inspector  will 
see  and  from  which  he  will  form  his  conclusions  might 
perhaps  be  seen  by  any  observant  person  but  not  seen 
so  clearly  nor  understandingly,  and  to  rely  upon  his 
deductions  from  those  facts  would  be  like  giving  an 
unskilled  person  a  set  of  surveyor's  instruments  and 
expecting  him  to  use  them  skillfully — he  might  get 
some  things  right  but  his  work  would  be  lacking  in 
any  dependable  qualities. 


XXI 


DUTIES  OF  INSPECTORS 


Aside  from  questions  of  title  and  personal  hazards, 
the  loan  valne  of  Real  property  is  based  upon  its 
market  value  plus  the  stability  of  that  value,  and  the 
various  conditions  that  indicate  such  stability  or 
instability  are  known  under  the  general  term  of  the 
moral  hazard  and  form  the  crux  of  the  mortg'age  loan 
business. 

The  investor  cannot  expect  to  find,  even  in  a  limited 
class  of  s;'cnrities  and  in  a  limited  territory,  that  a 
state  of  facts  of  equal  importance  is  co-existent  in 
any  considera])le  number  of  instances;  some  shades  of 
difference  will  always  be  observed  and  some  points 
found  to  be  favorable  and  some  to  be  unfavorable  in 
almost  every  offering,  and  it  is  the  most  important 
work  of  the  inspector  to  discover  and  assemble  these 
facts  and  to  estimate  them  at  their  true  worth  as 
affecting  the  general  moral  hazard. 

Some  of  these  hazards  may  be  found  to  be  affirma- 
tively good  and  some  to  be  bad ;  these  wall  trouble  the 
expert  very  little,  but  there  may  be  others  which 
when  viewed  from  one  angle  will  seem  to  be  good  and 
when  viewed  from  another  angle  contain  an  element 
of  uncertainty  that  may  be  very  perplexing.  It  is  true 
that  a  single  unfavorable  fact  is  often  conclusive  in 
itself,  but  this  is  never  true  of  the  single  favorable 

123 


124     MORTGAGE  LOAN  VALUES 

fact  and  in  these  cases  where  the  hazard  sooms  to  be 
generally  good  although  there  is  some  cloud  uiioii  its 
excellence,  favorable  decisions  should  be  wilhluOd 
until  all  of  the  facts  which  may  in  any  way  affect  llic 
moral  hazard  have  been  very  closely  serutiuizcd 

There  are  persons,  of  course,  whose  experience  has 
been  such  as  to  qualify  them  to  judge  intelligently  of 
both  city  and  farm  values,  but  as  a  rule  the  opinion 
of  an  inspector,  no  matter  how  capable  he  may  be  in 
one  field,  is  not  dependable  in  both,  for,  as  has  been 
pointed  out,  the  conditions  in  these  are  wid-ly  differ- 
ent in  many  respects  and  the  things  that  may  be 
obvious  to  the  expert  in  one  line  may  be  entirely  over- 
looked by  the  expert  in  the  other  line. 

A  most  competent  judge  of  farm  loans  may,  for 
instance,  be  unable  to  see  a  "misfit"  in  a  city  build- 
ing and  its  location,  or  he  may  fail  to  detect  evidences 
of  stagnation  in  neighborhood  values.  On  the  other 
hand,  a  shrewd  and  practical  city  loan  man  seldom 
knows  the  surface  indications  of  an  unfavorable  sub- 
soil and  may  easily  be  deceived  by  a  brave  showing  of 
crops  on  land  which  could  not  produce  them  except 
under  very  unusual  conditions,  while  each  inspector 
in  his  own  field  would  be  able  to  see  these  things  at  a 
glance. 

The  opinion  of  a  farm  expert  is  seldom  sought  in 
the  matter  of  city  values,  and  a  majority  of  investors 
in  such  securities  would  no  doubt  consider  it  unwise 
to  do  so,  but  it  does  not  seem  to  be  unusual  for  an 
investor  in  farm  mortgages  to  make  the  mistake 
(although  the  lender  seldom  does  so)  of  depending 
upon  the  judgment  of  a  city  loan  man  in  determining 


MORTGAGE  LOAN  VALUES      125 

farm  values.  They  apparently  regard  the  expert  in 
city  loans  as  an  expert  in  all  Real  Estate  loans 
although  in  fact  his  judgment  as  to  certain  features  of 
farm  securities  is  really  more  apt  to  be  at  fault  than 
is  that  of  tlie  farm  expert  when  attempting  city  valua- 
tions. 

The  investigator  is  always  at  a  disadvantage  when 
attempting  to  do  work  outside  of  the  lines  to  which 
he  is  accustomed,  and  this  is  especially  true  when  the 
city  man  attempts  the  inspection  of  farms.  When 
making  city  inspections  he  will  find  many  distinter- 
ested  persons  among  bankers,  builders,  money  lenders 
and  Real  Estate  dealers,  the  concensus  of  whose 
opinions  is  of  value,  but  in  the  country  he  is  without 
this  aid,  for  those  w^io  know  the  facts  will  often 
hesitate  to  speak  frankly  to  a  stranger  if  doing  so 
would  be  unfavorable  to  the  locality  or  would  be 
regarded  as  unfriendly  by  a  neighbor. 

While  the  neighborhood  opinion  as  to  the  value  of 
the  property  is  always  important,  it  is  usually  of 
more  consequence  in  the  case  of  a  farm  than  of  city 
property,  for  in  such  a  case  it  will  have  more  influ- 
ence on  the  salability  of  the  property;  and  in  this 
matter  it  is  much  more  difficult  for  any  one,  and 
especially  for  the  city  man,  to  get  candid  and  truthful 
expressions  from  those  who  are  in  a  position  to  know 
than  it  is  for  almost  any  one  to  do  so  in  city  investiga- 
tions. This  is  not  because  of  any  local  lack  of  knowl- 
edge, for  the  contrary  is  nearly  always  true,  but  it  is 
because  of  greater  suspicion  of  the  stranger  who  does 
not  "belong"  and  an  appreciation  of  the  fact  that 


126  ]\IORTGAGE  LOAN  VALUES 

more  intimate  neiglil)()i-h()()d  relations  exist  amonf? 
country  people. 

The  farm  expert,  however,  when  examining  farm 
lands,  is  able  to  learn  many  things  without  asking 
questions,  and  when  he  finds  it  heeessary  to  ask  them, 
he  knows  how  to  do  so  in  a  way  that  will  elicit  much 
information  which  might  and  prol)Ml)ly  would  ho  with- 
held if  it  were  apparent  that  he  did  not  understand 
his  business.  When  examining  farm  securities,  the 
city  man  who  is  inexperienced  in  that  line  soon  real- 
izes that  he  is  at  a  disadvantage  and  sometimes  at- 
tempts to  offset  his  limitations  by  pretending  to  a 
knowledge  of  the  subject  which  he  does  not  possess, 
but  this  only  makes  matters  worse,  as  no  attempt  could 
be  more  hopeless  than  this  and  the  pretense  only 
invites  misinformation. 

Another  important  feature  of  the  loan  A^alue  is  the 
actual  average  income  value  of  the  property,  and 
in  the  case  of  city  property  this  can  usually  be  de- 
termined with  considerable  certainty  by  the  simple 
method  of  comparing  it  with  that  of  like  property  that 
is  similarly  located;  but  it  will  be  found  that  by  far 
the  greater  number  of  farms  are  either  occupied  by 
the  owners  or  are  rented  on  a  share  crop  basis,  and 
in  these  cases  the  inspector  must  be  able,  from  his  own 
knowledge  of  the  farming  business,  to  make  an  ap- 
proximate estimate  of  their  average  net  earnings. 

These  are  merely  a  few  examples  in  a  long  list  that 
might  be  given  of  the  special  features  belonging  to 
each  general  class  of  securities,  but  they  should  be 
sufficient  to  cause  the  investor  to  pause  before  intrust- 
ing  loan   valuations   to   any    except    those   who    are 


I\IORTGAGE  LOAN  VALUES  127 

expert  judges  of  the  kind  of  property  under  con- 
sideration. 

The  inspector's  work  should  always  be  limited  to 
the  class  of  investigations  with  which  he  is  most 
familiar,  for  in  these  he  will  l)e  most  practical  and  it 
is  very  important  that  his  conclusions  should  be  along 
practical  rather  than  theoretical  lines;  and  while 
certain  rules  as  to  valuations  apjiJy  in  all  cases,  each 
of  the  two  general  classes  of  property  has  practical 
features  which  are  j^ecidiar  to  itself  and  which  must 
be  taken  into  account  in  determining  their  loan 
values. 

It  is  sometimes  thought  that  a  farm  inspector  must 
certainly  be  competent  if  he  has  a  theoretical  kuoAvl- 
edge  of  the  modern  or  what  are  called  "scientific" 
methods  of  farming,  but,  while  su(*h  knowledge  is  no 
doubt  an  asset,  it  can  by  no  means  be  relied  upon, 
because  unless  he  can  make  his  estimates  of  income  on 
the  basis  of  common  ordinary  farming  methods  and 
not  allow  potentialities  to  influence  his  judgment,  he 
is  apt  to  prove  a  failure,  for  the  lender  can  only  rely 
upon  the  ordinary  methods  being  followed. 

It  will  also  be  apparent  that  the  same  princijile 
applies  to  city  loans,  and  that  while  it  is  desirable  that 
the  investigator  should  have  a  l)road  enough  vision 
to  see  the  future  possibilities  of  the  property  and  the 
locality,  he  should  estimate  the  value  of  this  feature 
as  appreciating  or  depreciating  the  moral  hazard 
only,  and  confine  his  estimates  to  actual  values  as  he 
finds  them  to  be  based  upon  the  current  facts. 


XXII 

BUILDING   COST   ESTIMATES 

It  is  not  to  be  expected,  nor  is  it  necessary,  that  the 
inspector  who  deterjnines  the  loan  valne  to  be  placed 
upon  a  building  should  have  as  exact  knowledge  of 
the  cost  of  its  construction  as  would  be  expected  of  a 
builder  or  contractor  who  might  be  asked  to  estimate 
the  cost  of  its  duplication. 

It  is  quite  important,  however,  for  the  inspector  to 
be  able  to  estimate  its  ai)proximate  cost  with  reason- 
able certainty,  for  such  cost  very  frequently  affects 
and  sometimes  go^ferns  the  price  for  whicli  the  prop- 
erty can  be  sold,  although  so  many  other  elements 
enter  into  the  question  of  its  loan  value  that  the 
amount  of  its  original  cost  less  its  physical  deprecia- 
tion may  mean  either  much  or  little  to  the  investor. 

ExpensiA^e  construction  and  a  good  state  of  preser- 
vation, for  example,  may  be  offset  by  conditions  that 
interfere  with  the  salability  of  the  property  at  a  price 
which  its  cost  might  otherwise  seem  to  justify,  and 
the  main  question  for  the  inspector  to  decide  is  not 
upon  its  physical  value  as  based  upon  its  original  cost 
less  its  physical  depreciation,  but  it  is  upon  the  loan 
value  shown  by  its  present  market  value  as  justified 
by  the  stability  of  that  value. 

This  is,  of  course,  always  the  main  question.  It  is 
true,    however,    that    its    consideration    also    usually 

128 


MORTGAGE  LOAN  VALUES      129 

involves  that  of  the  cost  of  the  building  and  the  char- 
acter of  its  construction,  and  that  in  tliose  eases 
where  the  proper  equilibrium  has  been  maintained 
between  its  cost  and  the  market  demand,  such  cost 
less  the  physical  depreciation  is  usually  balanced  with 
its  value  for  loan  purposes,  except  in  special  purpose 
properties  and  those  which  conform  to  temporary 
"fads"  in  style  or  construction. 

A  good  class  of  material  and  workmanship  in  a 
building  will  go  far  towards  indicating  its  greater 
ability  to  withstand  depreciation  from  age  and  it  thus 
enters  into  the  moral  hazard  even  when  its  additional 
cost  does  not  warrant  a  corresponding  increase  in 
the  loan  value,  and  a  ' '  cheapened ' '  building,  although 
of  good  style  and  good  present  salability,  must  be 
discounted  because  of  this  fact. 

It  is  evident  then  that  the  inspector  should  not  de- 
pend wholly  upon  what  he  may  be  able  to  learn  as 
to  the  market  value  of  the  property  but  should  have 
a  good  working  knowledge  of  the  approximate  cost  of 
the  various  kinds  and  classes  of  material  and  construc- 
tion, their  average  yearly  per  cent  of  depreciation 
from  age  and  the  ordinary  cost  of  their  maintenance. 
He  should  be  able  to  recognize  the  different  grades 
of  material  and  workmanship  and  to  detect  any  signs 
of  cheapened  construction  and  should  be  able  to  tell 
whether  or  not  a  proper  equilibrium  has  been  main- 
tained between  the  "show"  parts  and  the  less  prom- 
inent parts  of  the  building  as  well  as  between  its  entire 
cost  and  the  value  of  the  ground. 

Such  knowledge  can  only  be  acquired  by  consider- 
able study  and  experience,  for  costs  of  material  and 


130     MORTGAGE  LOAN  VALUES 

labor  vary  at  different  times  and  at  different  i)laees. 
and  sueh  1  kings  as  foundations,  inside  finisli  and 
bnilt-in  equipment  in  the  way  of  elevators,  healino; 
plants,  etc.,  will  considerably  alter  the  cost  of  build- 
ings which  have  very  much  the  same  general  appear- 
ance. 

If  the  inspector  learns  these  things  and  k'>eps  them 
in  mind  the  following  tables  of  approximate  and  rela- 
tive values,  etc.,  may  sometimes  be  of  service  to  him, 
but  he  must  learn  to  use  them  only  in  the  way  of 
general  information,  for  this  is  their  only  dei^endable 
use. 

It  is  evident  that  tAvo  buildings  of  the  sam(>  general 
style,  construction  and  finish  will,  if  built  under  the 
same  labor  and  material  conditions,  cost  about  the 
same  per  cubic  foot,  notwithstanding  the  fact  that 
they  may  differ  somewhat  in  size  and  shape,  and  the 
following  tables  have  been  based  upon  what  are  l)e- 
lieved  to  be  the  average  prices  and  average  condi- 
tions and  reasonably  free  from  the  abnormalities  of 
unsettled  times. 

It  will  be  noted  that  there  is  considerable  variation 
between  the  minimum  and  maximum  estimates  given 
in  each  case,  and  this  makes  the  use  of  such  tables 
impractical  except  for  the  purpose  of  showing  the 
general  facts;  such  variation,  however,  is  unavoidable 
in  tables  which  do  not  contemplate  the  exact  duplica- 
tion of  every  detail. 

In  these  estimates  calculations  have  been  made  from 
the  floor  of  the  cellar  or  basement  to  the  roof  in 
those  cases  where  the  roof  is  a  flat  one,  and  that 


MORTGAGE  LOAN  VALUES     131 

part  above  the  eaves  in  which  there  is  head  room,  in 
other  cases. 

Open  porches  are  not  included  in  these  figures  and 
perhaps  they  can  be  brsl  estimated  upon  a  square 
foot  basis  which  in  frame  construction  will  be  about 
one  dollar  for  vei-y  plain  ones  and  from  two  to  two 
and  one-half  dollars  for  more  substantial  ones.  Brick 
or  masonry  construction  will  add  about  30%  to  these 
figures. 

Cubic  Foot  Estimates  on  City  and  Town  Property. 

(Add  %c  for  slate  or  metal  roofs) 

Dwellings — Frame,  hardwood  floors  and  fin- 
ish bath,  furnace,  laundry,  good  plumb- 
ing, 1st  class  throughout 13  to  15c 

Dwellings — Frame,  part  hardwood  floors 
and  finish,  bath  and  furnace,  good  but 
inferior  to  above,    10  to  12c 

Dwellings — Frame,     plain    but    good,     pine 

floors  and  finish,  no  bath  or  furnace,.  ...   8  to    9c 

Dwellings — Brick,  1st  class, 14  to  16e 

Dwellings — Brick,  2nd  class, 11  to  13c 

Dwellings — Brick,  3rd  class,   10  to  12c 

Large  Brick  or  Stone  Mansions — 

1st  class,  good  and  substantial, 40  to  53c 

Additions  to  same,    22  to  27c 

2nd  class,  less  costly  but  good, 29  to  40c 

Additions  to  same, 20  to  27c 

Flats — Brick,  stone  or  ornamental  l)rick 
fronts,  fire-proof  throughout,  with  eleva- 
tors and  all  modern  equipment,  elabor- 
ately finished, 55  to  60c 


132  IMORTGAGE  LOAN  VALUES 

Flats — Brick,  some  ovnanKMitatioii,  well  fin- 
islu'd,  witli  elevators,  fire  resisting  floors, 
etc.,  good  class, 37  to  48c 

Flats — Brick,  ordinary  class,  plain  but  good, 

with  elevators,  28  to36c 

Flats — Brick,  cheap  class,  no  elevators, 20  to  27c 

Store  Buildings — 2  to  4  stories,  ordinary 
brick  and  timber,  plain  finish,  no  ele- 
vators,     1 2  to  loe 

Store  and  Office  Buildings — Non-fireproof, 
complete  with  elevators  and  all  necessary 
machinery,     23  to  31c 

Office  Buildings — Fire-proof,  complete  in  all 
respects,  good  but  with  plain  finish,  with 
elevators  and  heating  plants,   32  to  55c 

Office  Buildings — Fire-proof,  steel  frames, 
extra  finish  in  all  respects,  cut  granite 
in  steel  frames,  etc.,  with  elevators  and 

heating  plants,   55  to  80c 

(Office  buildings  have  a  wide  range  of  cost 
owing  chiefly  to  ornamentation  and  the 
elaborateness  of  finish,  etc.) 

Warehouses — 4  to  7  stories,  mill  construction, 

brick  walls,  freight  elevators,   13  to  16c 

"Warehouses — 4  to  7  stories,  fire-proof,  extra 
heavy  construction,  elevators,  brick  walls, 
plain  finish  with  good  front, 20  to  25c 

Estimates  for  Buildings  on  Farms  or  in 
Small  Villages. 

(A  very  great  variation  will  also  be  found  in  the 
practical  application  of  these  estimates,  chiefly  be- 


MORTGAGE  LOAN  VALUES      133 

cause  of  the  difference   in  the   cost  of  pla'.'injr  the 

material  npon  the  ground.) 

Dwellings — Frame,  1st  class,  good  eonstrnc- 

tion  and  finish, 1 0  to  12c 

Dwellings — Frame,  2ud  class,  plain,  painted. 

small  cornice,  good  fonndation, 7i/i>  to  Oc 

Dwellings — Frame,  3rd  class,  box  honse,  nn- 

painted,  no  cornice,  on  blocks  or  piers,  .  .41/^  to  6? 

Dwellings — Brick,  1st  class  (as  above), 12  to  14c 

Dwellings — Brick,  2nd  class  (as  above), 10  to  12c 

Barns — Frame,  1st  class,  well  finished,  good 

foundation,  painted,  complete,   6  to    9c 

Barns^Frame,  2nd  class  but  good  con- 
struction, good  foundation,  painted,   .  .  .  3i/2  to  5c 

Barns — Frame,  3rd  class,  cheap,  unpainted. 

on  blocks  or  piers, 2  to  3i/^c 

Country  Stores — Frame,  ordinary,  plain  fin- 
ished, painted,  good  foundation 7  to    9c 

Country  Stores — Brick,  well  finished,  paint- 
ed, good  foundation,   11  to  13c 

The  following  table  showing  the  depreciation  of 
frame  and  brick  buildings  is  said  to  be  used  ])y  the 
United  States  Government : 

Table 
Brick  when  occupied  by  owner,  1      to  114%  per  year 
Brick  Avhen  occupied  by  tenant,  I14  ^0  lMi%  P^"!"  year 
Frame  when  occupied  by  owner,  2      to  2^/^%  per  year 
Frame  when  occupied  by  tenant,  2i/2  to  3     %  per  year 

This  rule  contemplates  a  good  grade  of  buildings 
on  which  ordinary  repairs  have  been  made,  and  it 


134  ]\rORTGAGE  LOAN  VALUES 

should  1)('  varied  as  repairs  have  been  more  or  less  than 
ordinary. 

Tlie  pliysical   depreciation  aeeordino;  to 

other  authorities  is  for  cheap  frame 

buildings,    10  to  1 5  years 

Ordinary  frame  residences,   20  to  30  years 

Good  class  frame  residences, 35  to  50  years 

Cheap  brick  buildings,  25  to  30  years 

Ordinary  brick  or  stone  buildings, 35  to  50  years 

Good  brick  or  stone  buildings,   50  to  75  years 

Best  brick  or  stone  buildings, 75  to  100  years 

The  life  of  steel  and  concrete  buildings  is  unknown. 

Such  tables  are  of  little  value,  however,  for  they 
are  intended  to  show  only  the  average  phvsical  depre- 
ciation of  various  classes  of  construction  and  there 
are  many  other  causes  for  loss  of  value,  some  of 
which  are  almost  if  not  quite  as  relentless  as  time. 
For  example,  the  physical  loss  may  be  very  low  and 
the  building  may  have  had  the  best  of  care  and  there- 
fore may  be  especially  well  preserved,  but  the  style  of 
its  architecture  or  of  its  inside  arrangement  or  fit- 
tings may  lose  their  popularity  in  a  short  time  as 
they  most  certainly  will  do  eventually,  and  when  they 
do  so  the  former  sale  values  will  no  longer  exist. 

In  reaching  conclusions  as  to  the  market  value  of 
a  building  the  inspector  will  also  find  that  the  rela- 
tion which  its  physical  value  bears  to  the  value  of 
the  ground  upon  which  it  stands  is  an  important 
feature. 

As  a  general  rule,  he  will  find  that,  in  order  to  be 
well  balanced,  ordinary  residence  and  business  prop- 


MORTGAGE  LOAN  A'ALU?]S  135 

eiiies  should  not  li;ivo  ;in  initial  cost  of  less  than  the 
value  of  the  gronnd  noi-  should  they  exceed  three 
times  this  amount.  Otliei-  pi-operties,  however,  such 
as  apartments,  warehouses.  hos]iitals,  etc.,  which 
require  rather  expensive  eonstruction  hut  do  not  need 
expensive  locations,  may  exceed  tliis  and  sometimes 
are  not  out  of  halance  at  five  to  six  times  the  gronnd 
value,  provided  that  they  are  also  well  suited  to 
their  location  in  otlier  respects. 

This  rule  presupposes  that  in  estimatinp:  city  loan 
values  only  a  suitable  and  necessary  amount  of  ground 
Avill  be  considered;  for  instance,  a  house  which  would 
be  suitably  located  on  fifty  feet  frontage  of  laud  must 
not  be  balanced  against  the  1.10  or  200  on  which  it 
may  stand,  the  va-ant  ground  in  such  cases  being  very 
generally  u.n productive. 

Th'^  sam"  principle  ap|ilies  to  farm  buildings,  but 
the  question  here  is  on  their  suitability  and  physical 
value  measured  by  the  needs  of  the  whole  farm,  for  in 
this  case  it  is  tlie  productiveness  of  the  soil  that  gives 
to  the  whole  property  its  income  A'alue  and  in  the 
other  it  is  the  housing  needs  of  the  people  which  makes 
the  building  itself  do  this. 

Another  very  important  mattei*  for  the  inspector  of 
city  buildings  to  consider  is  the  cost  of  maintenance 
of  various  classes  of  property.  This  is  necessary  in 
order  that  he  may  be  able  to  reach  safe  conclusions  as 
to  the  net  earnings  upon  which  the  loan  value  of  any 
particular  property  should  be  based. 

This  cost  of  maintenance  will  vary  greatly,  owing 
to  the  character,  location  and  uses  of  the  property, 


136     MORTGAGE  LOAN  VALUES 

but  will  probably  follow  a  rule  somewhat  as  indicatod 
by  the  following: 

Table 

Ordinary  store  buildings  about  10  to  15%  of  gross  rent 
Cheap  residences  without 

plumbing    15  to  20%  of  gross  rent 

Good  residences    20  to  30%  of  gross  rent 

Ordinary  office  buildings 25  to  35%of  gross  rent 

High  class  office  buildings  .  .  .40  to  60%  of  gross  rent 

Flats  without  elevators  35  to  45%  of  gross  rent 

Flats  with  elevators  40  to  50%  of  gross  rent 

Service  costs  will  be  found  to  make  up  a  large  part 
of  the  difference  between  the  higher  and  the  lower 
class  properties  above  listed. 

It  will  also  be  seen  that  the  maintenance  cost  is 
proportionately  less  in  the  less  expensive  buildings, 
and  if  the  gross  rental  affords  the  same  interests  rate 
in  each  case,  the  net  interest  earnings  are  less  in  the 
more  expensive  ones,  and  their  owners  must  look  to 
the  enhancement  of  ground  values  and  the  longer  life 
of  the  buildings,  or,  in  other  words,  to  more  indirect 
results  for  their  profits. 


XXIII 

PHYSICAL       AND       MORAL       VALUES       OF       REAL       ESTATE 
SECURITIES 

Ascertaining  the  market  value  of  Real  Estate  is 
not  always  as  simple  a  matter  as  many  persons  be- 
lieve it  to  be,  although  when  the  market  for  Keal 
property  in  the  neighborhood  has  been  fairly  bnt  not 
nndnly  active  upon  ordinary  cash  terms,  there  Avill 
always  be  a  basis  for  jirompt  conclusions. 

Any  variation  from  these  conditions  will  present 
problems  which  should  be  referred  to  no  one  except 
an  expert  for  solution.  The  local  Real  Estate  market 
for  some  reason  may  have  been  unduly  active  and 
may  have  shown  recent  rapid  advances,  on  the  otlier 
hand,  its  market  may  have  been  stagnated  or  sales 
made  at  falling  prices,  or  what  is  more  common,  ask- 
ing prices  may  have  been  maintained  but  transfers 
only  made  under  especially  easy  terms  of  payment  or 
by  exchanges  of  other  property,  and  in  any  such  cases 
its  true  value  may  be  very  difficult  to  determine. 

It  has  been  held  that  the  price  for  which  Real 
Estate  is  sold  without  distress  and  bought  without 
necessity  fixes  its  value,  but  tins,  of  course,  presup- 
poses the  price  paid  to  be  in  cash  or  its  equivalent. 
Theoretically  this  is  a  sound  rule  and  one  that  should 
alwaj'S  be  kept  in  mind  and  applied  whenever  pos- 
sible, for  no  other  one  fact  will  point  so  strongly  to 

137 


IN  THE   NORTHWEST 


138 


MORTGAGE  LOAN  VALUES     139 

the  true  value,  but  in  attempting  its  practical  appli- 
cation to  mortgage  loan  valuations,  difficulties  will 
often  be  encountered,  because  of  the  fact  that  in  a 
majority  of  cases  it  will  be  found  that  neither  the 
property  offered  nor  any  similar  nearby  properties 
have  been  recently  bought  and  sold  under  those  con- 
ditions. 

Where  sales  have  been  made  without  apparent  dis- 
tress upon  one  hand  or  necessity  upon  the  other,  it 
will  often  be  found  that  the  seller  has  had  su'-h  profit- 
able and  immediate  use  for  ready  cash  or  the  buyer 
such  special  use  or  fancy  for  the  property  as  to  induce 
the  sale  at  either  less  or  more  than  its  real  value,  or 
it  may  be  that  the  buyer's  ignorance  of  real  values, 
or  his  optimistic  ideas  of  their  future  appreciation,  or 
the  exchange  price  of  other  property,  or  the  ad- 
vantage of  a  small  initial  payment  or  of  a  long  time 
granted  upon  deferred  payments  have  entered  into 
the  transactions  and  thus  affected  the  price. 

Evidences  of  the  market  value  of  property  should 
first  be  sought  by  inquiries  concerning  recent  trans- 
fers in  that  neighborhood  and  the  conditions  under 
which  such  transfers  were  made.  Then,  by  reducing 
these  conditions  to  a  cash  basis  and  comparing  the 
marketable  qualities  of  the  property  which  has  been 
sold  with  those  of  the  property  which  is  under  investi- 
gation, the  inspector  may  reach  approximately  true 
conclusions,  provided  that  the  local  Real  Estate  mar- 
ket is  a  normal  one. 

In  cases  where  it  is  found  that  no  nearby  property 
has  been  recently  sold  inquiry  should  be  made  as  to 
what  offers,  if  any,  have  been  made  and  refused,  and 


140     MORTGAGE  LOAN  VALUES 

if  no  offers  have  been  made,  then  it  should  l)e  ascer- 
tained what  price,  in  the  opinion  of  nearby  owners  or 
agents,  could  be  secured  and  upon  what  terms;  and 
these  figures  should  then  be  checked  against  the  pres- 
ent and  potential  income  value  of  Ih'^  property  for 
ordinary  and  legitimate  uses,  taking  into  account  its 
present  condition  and  state  of  repair. 

Efforts  are  often  made  to  induce  an  inspector  to 
give  weight  to  very  insufficient  arguments  and  incon- 
clusive facts.  It  is  sometimes  the  foolisli  practice  of 
agents  and  owTiers  in  those  sections  where  tliere  has 
been  little  activity  in  Real  Estate  to  avoid  the  prac- 
tical question  of  the  price  at  which  l)uyers  for  the 
property  could  be  procured,  and  to  seek  to  convey  the 
information  wanted  by  stating  a  price  at  which  in 
their  opinion  neighboring  properties  could  not  be 
bought,  which  is  no  answer  to  the  question  at  issue  and 
imposes  on  none  except  the  inexperienced.  Assess- 
ments for  taxation  are  so  different  in  different  places 
and  under  different  systems  that  they  are  of  little 
value  except  as  they  may  put  the  investor  on  inqnirj' 
in  those  cases  where  they  seem  to  be  unreasonable ; 
rumored  sale  prices  and  even  considerations  recited 
in  deeds  should  always  be  accepted  with  caution  and 
large  gross  incomes  should  never  blind  the  inspector 
to  the  fact  that  it  is  only  the  net  income  which  counts. 

Arriving  at  safe  conclusions  in  the  matter  of  the 
moral  hazard  is  sometimes  difficult,  more  often  and 
more  especially  so  in  the  case  of  city  loans,  for  these 
are  much  more  dependent  upon  changing  conditions 
than  are  farm  loans;  in  these  offerings  the  city  itself 
must  be   first   considered,   its  size   and  location,   its 


MORTGAGE  LOAN  VALUES      141 

transportation  facilities,  the  character  and  diversity 
of  the  indnstries  from  which  it  draws  its  support,  its 
nearby  rivals,  and  its  general  prosperity. 

The  general  location  of  the  property  in  the  city 
mnst  then  be  considered,  whether  or  not  such  loca- 
tion is  within  the  lines  of  the  city's  advancement  and 
well  within  the  limits  of  established  values,  its  liability 
to  heavy  assessments  for  special  improvements,  its 
vacancies  and  their  causes,  and,  in  fact,  all  of  the  sur- 
rounding conditions  which  may  indicate  the  probable 
permanency  of  the  present  market  values,  this  being 
an  essential  feature  of  the  loan  value  sought  to  be 
ascertained. 

When  the  property  itself  is  reached  in  this  investi- 
gation, it  must  be  measured  by  the  requirements  of 
its  surroundings,  it  must  be  found  to  fit  its  location 
and  uses,  its  style  and  construction  should  be  such 
that  it  will  not  greatly  depreciate  during  the  life  of 
the  proposed  loan,  and,  except  when  the  money  is 
borrowed  for  the  purpose  of  its  improvement,  its 
present  condition  must  be  good. 

The  value  of  the  ground  should  be  in  a  fair  pro- 
portion to  the  value  of  the  entire  property,  its  rental 
value  for  ordinary  and  lawful  purposes  should  justify 
its  loan  valuation,  and,  if  the  improvements  are 
designed  for  special  uses,  they  should  also  be  available 
for  other  purposes,  unless  the  ground  value  alone  will 
fully  warrant  the  loan. 

As  to  the  stability  attending  farm  values  the  situa- 
tion is  not  nearly  so  complicated,  and  when  the  value 
of  the  buildings  does  not  exceed  the  amount  w^hieli  is 
necessary  to  its  proper  equipment,  the  salability  of 


142     MORTGAGE  LOAN  VALUES 

the  fai-iu  is  not  so  likely  to  be  endangered  during  the 
life  of  an  oi-dinai-y  loan,  except  in  those  cases  where 
the  land  is  especially  liable  to  overflows  or  erosions 
or  the  failure  of  irrigation  systems  or  destruction  of 
fences,  nor  is  its  salability  likely  to  be  affected  by 
neighborhood  changes,  which  may  easily  be  the  case 
with  city  property. 

Occasionally  a  section  will  be  found  where  the 
"bear"  element  seems  to  prevail  in  Real  Estate  mat- 
ters, and  its  actual  selling  value  is  found  to  be  below 
its  ostensible ,  value.  Whenever  this  situation  exists 
it  should  be  accepted  by  the  investor  at  its  full  face 
value,  for  whether  it  is  well  grounded  or  not,  nothing 
will  tend  more  to  depress  prices  than  will  pessimistic 
views  on  the  part  of  those  persons  who  might  be  buy- 
ers or  from  whom  prospective  buyers  will  get  informa- 
tion. 

Nor,  on  the  other  hand,  should  optimistic  views, 
which  are  much  more  common,  ever  be  accepted  at 
their  face  value,  for  it  is  probably  true  that  no  large 
number  of  loans,  however  poor,  was  ever  made  by  any 
honest  lender  that  was  not  warranted  by  the  local 
ideas  of  conditions  and  prices  at  the  time  when  they 
were  made. 

All  matters  which  may  affect  the  stability  of  values 
should,  therefore,  be  closely  investigated  in  the  inter- 
est of  the  investor,  and  this  should  be  done,  if  possible, 
by  some  one  whose  experience  covers  a  wider  field 
than  the  local  one,  and  who  knows  better  what  may 
happen,  the  measure  of  its  probability,  and  the  meas- 
ure of  its  damage  to  values  if  it  does  happen,  than  he 
who  has  only  the  local  view  to  guide  his  judgment. 


XXIV 

ABSTRACTS  OF  THE  RECORD  TITLES 

The  abstract  of  title  to  Real  Estate  purports  to 
sliow,  and  should  sliow,  the  exact  condition  of  the 
record  title  to  the  property  up  to  the  date  when  it 
is  last  certified.  It  is  a  most  important  loan  paper, 
for  the  title  in  the  borrower  and  his  right  to  alienate 
the  property  are  essential  in  every  loan  transaction 
and  must  be  fully  and  definit(4y  determined. 

It  sometimes  happens  that  tlie  record  titles  in  a 
certain  territory  are  not  very  generally  satisfactory, 
but  the  reason  for  this  is  not  so  apt  to  be  that  the 
titles  therein  are  bad  as  that  there  is  insufficient  evi- 
dence of  good  ones. 

In  a  section  where  such  a  condition  exists  as  to  all 
Real  Estate  it  has  usually  been  brought  about  by  the 
destruction  of  the  public  records.  Other  causes,  how- 
ever, such  as  the  mistakes  of  incompetent  convey- 
ancers, the  omissions  of  careless  recorders  or  the  indif- 
ference or  carelessness  of  former  OA\aiers  who  have 
neglected  to  have  their  evidences  of  title  recorded, 
have  contributed  to  a  bad  condition  of  tho  records  of  a 
large  proportion  of  the  Real  Estate  holdings  in  many 
localities,  and  such  errors  are  found  most  frequently 
perhaps  in  some  of  the  older  sections  of  the  Southern 
States. 

AVhenever  these  conditions  exist  to  any  considerable 
143 


144     MORTGAGE  LOAN  VALUES 

extent  it  is  a  source  of  groat  annoyance  and  somotimes 
even  of  danger  to  the  investor,  because  it  creates  a 
situation  that  must  be  met,  as  well  as  may  be,  by 
suits  to  quiet  titles,  statutes  of  limitation,  or  special 
legislative  enactments,  nojie  of  wliicli  is,  niub-i-  all  cir- 
cumstances, satisfactory  or  con-lnsive,  alt  hough  in 
any  territory  they  sometimes  affoid  the  only  depend- 
ence of  the  title. 

There  are  few  perfect  titles,  and  all  manner  of 
faults  may,  of  course,  be  found  in  the  individual  ones 
in  any  territory,  especially  in  the  older  sections,  but 
these  can  usually  be  cured,  in  a  practical  way  at 
least,  and  marketable  titles  shoAvn ;  and  it  is  only  when 
defects  in  the  records  are  found  to  be  very  common 
and  very  serious  that  the  investor  is  justified  in  avoid- 
ing the  territory  for  this  reason. 

There  is  no  other  requirement  of  the  mortgage  loan 
business  that  is  of  more  importance  than  that  the 
abstract  of  the  title  record  should  be  a  true  one.  and 
yet  it  seems  to  be  a  very  common  practice  among 
lenders  and  investors  to  accept  at  its  face  value  any 
document  which  purports  to  be  an  abstract  of  the 
title  to  the  property  offered  as  security.  They  very 
properly  rest  upon  the  opinions  of  their  attorneys 
but  apparently  fail  to  realize  that  the  evil,  if  any 
exists,  lies  back  of  that  and  that  all  that  such  attor- 
neys can  do  and  all  that  they  ever  attempt  to  do  is 
to  pass  upon  the  title  as  shown  by  the  abstract  which 
has  been  furnished  them  for  examination  and  to 
recommend  an  additional  showing  of  facts  if  it  should 
be  incomplete;  their  opinions  never  are  and  never  can 


MORTGAGE  LOAN  VALUES      145 

I 

be  flatly  on  the  actual  title  nor  on  the  truth  of  tlie 
abstract. 

Sometimes  apparently  complete  abstracts  are  fur- 
nished and  acted  upon  that  are  afterward  found  to 
be  imperfect  in  some  important  respect,  and  for  this 
reason  it  would  seem  to  be  a  wise  rule  that  none 
should  be  accepted  without  some  evidence  as  to  the 
equipment,  reputation  and  responsibility  of  the  ab- 
stractor who  prepared  it. 

It  is  very  well  known  that  in  many  sections  of  the 
country  there  are  persons  or  firms  to  be  found  in 
almost  every  county  seat  who  are  regularly  engaged 
in  this  business,  persons  who  are  equipped  with  copies 
of  the  public  records,  which  they  keep  up  to  date,  of 
every  transaction  recorded  therein  affecting  the  title 
to  each  piece  of  Real  Estate  located  in  the  district  in 
which  they  operate. 

It  is  possibly  not  so  well  known,  however,  that  in 
many  places  where  a  considerable  Real  Estate  and 
mortgage  loan  business  is  done  there  is  no  one  wlio  is 
regularly  engaged  in  the  Inisiness  of  abstracting  the 
records,  this  work  being  attended  to  in  each  case 
as  it  comes  up  by  some  person,  usually  an  attorney 
who  is  interested  in  the  matter  and  to  whom  the  work 
is  an  avocation  instead  of  a  vocation. 

The  abstractor  who  makes  a  regular  business  of  tlie 
work  has  an  advantage  over  otliers  in  the  opportunity 
that  it  affords  him  for  a  more  intimate  knowledge 
of  the  history  of  all  of  the  land  titles  in  his  territor}' 
and  many  incidental  matters  which  indirectly  affect 
them ;  and  with  such  knowledge  he  is  often  better  able 
than  others  to  supply  collateral  evidence  which  will 


146     MORTGAGE  LOAN  VALUES 

serve  to  illuminate  ohscui-e  jilaces  in  record  titles  that 
might  otherwise  seem  to  be  sei-ionsly  defective. 

Under  ordinary  eirenmstanees  it  is  often  found  to 
be  sufficient  in  "perfecting"  record  titles,  that  is,  in 
making  tliem  good  and  marketal)]e,  llinl  ((uit-claira 
deeds  or  disclaimers  of  rights  oi'  iulei-csts  sluiU  be 
executed  by  those  persons  in  whom  there  may  be 
riglits  or  interests  which  would  cloud  the  title  in  the 
applicant,  or  that  affidavits  shall  be  procured  from 
snch  reputable  persons  as  may  have  a  prol)able  knowl- 
edge of  the  facts  when  they  are  found  to  be  necessary 
in  order  to  establish  such  things  as  the  dates  of  deaths 
or  marriages  or  the  identity  of  persons  whose  names 
appear  differently  in  the  records. 

These  are,  of  course,  matters  for  the  investor's  at- 
torney to  pass  upon,  but  the  well  equipped  and  com- 
petent abstractor  can  and  does  aid  him  in  this  work. 

When  the  record  of  a  title  is  abstracted  by  a  person 
who  is  not  regularly  engaged  in  the  business,  he  may 
do  the  work  as  thoroughly  and  make  as  true  and  com- 
plete an  abstract  as  any,  and  this  is  perhaps  generally 
the  case,  but  persons  sometimes  undertake  the  work 
who  are  incompetent,  careless,  and  irresponsible,  and 
the  greater  number  of  these  will  doubtless  be  found 
among  those  who  are  not  regularly  engaged  in  the 
business. 

The  alleged  abstracts  made  by  such  persons  are 
often  based  upon  indexes  only;  wills,  deeds,  mort- 
gages, releases,  etc.,  being  simply  cited  as  such  in  the 
abstract,  notwithstanding  the  fact  that  by  the  exact 
terms  of  these  documents,  the  maker  of  the  will  may 
not  have  legally  and  unconditionally  devised  the  prop- 


MORTGAGE  LOAN  VALUES      147 

erty  in  (jucstio]!  to  I  he  person  who  is  supposed  to  have 
inlierited  under  it,  nor  tlie  deed  have  conveyed  an 
indefeasil)le  title  to  it  in  fee  simple  to  the  grantee, 
nor  the  release  have  fully  released  it  from  all  claims 
under  the  mortgage. 

It  is  true  that  the  abstractor  certifies  the  abstrai^t 
and  that  in  many  instances  he  is  a  person  of  financial 
responsibility  or  that  he  is  bonded  (which  is  a  require- 
ment of  the  law  in  certain  States),  but  these' safe- 
guards only  cover  the  fact  that  the  various  records 
have  been  examined  by  him  and  nothing  found  therein 
that  is  not  shown  by  th^;"  al)stract,  and  neither  his 
personal  responsibility  nor  his  bond  may  be  adequate 
to  cover  losses  that  Avould  be  possible  because  of 
serious  mistakes  or  oversights  on  his  part. 

Although  no  ultimate  loss  may  occur,  carelessly 
made  abstracts  sIioav  many  titles  to  be  seriously  de- 
fective when  such  is  not  really  the  case;  on  the  other 
hand,  tliey  often  fail  to  show  existing  incumbrances 
and  title  complications. 

In  order  to  avoid  "unnecessary"  work  such  ab- 
stractors sometimes  use  "copies"  of  abstracts  into 
which  many  errors  may  have  found  their  way,  and 
for  the  same  reason  they  are  careless  in  the  matter  of 
affidavits,  for  it  is  little  trouble  to  procure  these,  and 
many  which  are  wholly  unreliable  are  used  for  the 
purpose  of  curing  the  defects  which  their  "abstracts" 
may  show. 

Occasionally  a  dishonest  abstractor,  having  an  inter- 
est in  shoAving  a  good  title,  has  been  known  to  deliber- 
ately make  such  a  showing  des;)i1(»  the  records  by  sup- 
plying the  missing  links  in  n  broken  chain  of  title  by 


148      MORTGAGE  LOAN  VALUES 

])ui-e  iuvciilion,  or  by  purposely  omitting  items  which 
Mould  show  a  state  of  facts  other  than  the  desired 
one. 

Two  plans  are  used  to  overcome  such  record-title 
difficulties  as  are  herein  mentioned,  but  each  is  used 
in  a  very  limited  area ;  one  is  the  introduction  of  the 
Torrens  system  of  title  records,  and  the  other  is  the 
establishment  of  Title  Guarantee  CV:)mpanies.  LTnder 
the  first  plan  the  title  is  guaranteed  by  the  State  or 
County  after  it  has  been  tried  by  a  constituted  author- 
ity and  adjudged  to  be  good;  under  the  second  it  is 
guaranteed  by  the  title  company  after  they  have 
examined  it  and  have  decided  that  it  is  insurable. 
Each  plan  involves  some  expense  to  the  property 
owner,  but  each  seems  to  afford  some  protection  to 
the  lender  provided  that  the  lial)ility  is  clearly  de- 
fined, that  the  financial  responsibility  is  ample  and 
that  relief  is  apt  to  be  reasonably  prompt  if  needed. 

Whatever  advantage  these  plans  may  present,  how- 
ever, their  operation  fails  to  extend  to  the  greater  part 
of  the  best  loan  territory,  while  the  guaranty  that  is 
afforded  the  mortgagee  by  the  work  of  fully  com- 
petent and  ]-esponsil)le  alistraetors  and  title  attorneys 
can  be  had  in  almost  any  good  territory  and  is  in  fact 
an  exceM|ngly  strong  guaranty  and  one  upon  whjLch 
he  may  rely "wi  thereat  confidence^ 


XXV 

THE  ACTUAL  TITLE  IN  THE  APPLICANT 

There  is,  however,  another  feature  of  the  question 
of  titles  which  must  not  be  overlooked  in  this  con- 
nection; it  is  the  condition  of  the  actual  title  in  re- 
spect to  those  things  which  may  affect  the  mortg'aijee's 
interests,  for  it  should  be  noted  that  this  condition 
may  or  may  not  be  shown  ]:)y  the  record  title — for 
instance,  the  record  does  not,  and  cannot,  shoAV  who 
is  in  personal  possession  of  the  property,  but  the  fact 
of  possession,  if  under  color  of  title,  may  determine  a 
.better  title  than  the  one  of  record  althougli  tliat  one 
may  be  complete. 

An  easement  ma,y  also  become  a  definite  riglit  in 
persons  who  do  not  hold  the  fee,  although  it  has  never 
been  made  a  matter  of  record;  or  rights  of  recovery 
from  the  property  may  accrue  under  mechanics  and 
material-men's  lien  laws,  which  claim,  when  filed  of 
record,  may  take  precedence  over  the  rights  of  a 
lender,  although  his  mortgage  may  have  been  executed 
before  the  actual  filing  of  such  lien,  or  a  homestead 
right  in  the  borrower  that  would  prevent  a  recovery 
by  the  lender,  may  exist  without  being  shown  either 
of  record  or  by  any  visible  possession  of  the  property, 
or  transfers  may  have  been  made  for  the  pui-pose  of 
evading  a  law  enacted  for  the  protection  of  the  wife's 
interest. 

149 


150  .MOKTOAeiE  LOAN  VALUES 

Examples  miji-lit  l)e  iiiiiltiplicd,  l)iit  under  a  careful 
system  of  examiualion  \hc  dauji'ei-  of  loss  to  the  in- 
vestor is  extremely  small  for  the  probahle  existence  of 
such  defects  is  nearly  always  indicated  in  some  man- 
ner by  the  statements  oi-  by  the  absence  of  certain 
statements  in  either  tlie  ap|)li('ation  or  the  abstract 
and  also  in  many  cas;  s  ai-e  suggested  by  the  sui'round- 
ing  circumstances  Avhich  come  under  the  supervision 
of  the  inspector,  who  should  be  fully  awake  and 
watchful  along  these  lines. 

For  instance,  if  the  application  states  that  the  prop- 
erty is  occupied  by  a  tenant  and  the  occupant  is 
found  to  be  a  person  of  the  name  given  and  appar- 
ently one  of  the  tenant  class,  whose  answers  to  rpies- 
tions  as  to  the  terms  of  his  tenancy  go  to  support  such 
statement,  the  danger  of  his  having  any  claim  to  own-' 
ership  may  be  considered  negligible,  especially  as  it  is 
a  trait  of  human  nature  for  him  to  claim  everything  to 
which  he  thinks  he  is  entitled. 

On  the  other  hand,  if  the  occnpant  is  evidently  not 
of  the  tenant  class,  or  if  he  is  a  near  relative  such  as 
a  son  or  daughter  of  the  applicant,  a  more  careful 
investigation  should  be  made,  and  unless  this  is  fully 
convincing,  due  caution  will  suggest  that  the  occupant 
should  be  required  to  make  a  Avritten  disclaimer. 

Easements  are  not  ordinarily  of  a  very  serious 
character  from  a  loan  point  of  view,  but  they  may,  of 
course,  be  such  as  to  depreciate  the  value  or  salability 
of  the  property,  and,  if  they  exist,  their  terms  should 
be  know^n  to  the  mortgagees.  The  signs  of  their  prob- 
able existence  and  importance  will  be  noted  by  the 
expert  inspector,  for  they  Avill  usually  be  indicated  by 


MORTGAGE  LOAN  VALUES      151 

paths,  roadways,  stairways,  irri«;ati()n  ditches,  etc., 
used  by  persons  other  tliaii  the  owikm's  oi-  occupants 
of  the  ]iroperty,  or  tlicy  may  be  shown  l)y  Ihc  en- 
croaclinients  of  (he  fences  or  l)\iihliii<i'S  of  th"  adjoin- 
ing' pi-opei'lies. 

Tlie  pr()l)al)ility  of  tlie  i-iglif  to  a  lien  against  the 
property  having  aecnied  for  labor  or  bnilding  ma- 
terial, is  also  usually  sliown  u]:»on  the  surface  the 
application  should  contain  a  statement  covering  this 
point,  but  notwithstanding  any  such  statement,  if  the 
property  has  been  very  recently  built  or  repaired,  or 
if  there  is  any  evidence  of  work  having  lieen  com- 
menced or  material  furnished  for  new  buildings  on 
the  ground  included  in  the  application,  the  borrower 
should  be  recjuired  to  execute  a  bond  for  the  protection 
of  the  mortgagee. 

The  homestead  and  exemption  laws  of  the  various 
States  are  not  generally  such  as  to  demand  more  than 
the  ordinary  attention  of  the  investor,  but  this  rule  is 
not  universal,  for  in  at  least  one  instance,  they  are 
of  very  grave  importance  indeed,  the  rights  under 
them  being  great  and  being  based  wholly  upon  the 
question  of  fact,  which  is  made  sus.'eptible  of  proof 
in  court,  and  if  proved  will  be  so  held  to  be,  although 
the  borrower  may/  have  made  contrary  declarations 
under  oath  for  the  purpose  of  procuring  the  loan.  It 
behooves  the  inspector  then,  in  casrs  where  this  ques- 
tion is  involved,  to  discover  the  facts,  and  he  should 
examine,  not  only  the  property  offered  as  security, 
but  also  the  declared  homestead,  in  order  that  he  may 
know  it  to  be  clearly  defined  and  actually  the  home 
stead    of    the    applicant,    and    he    sliould    also    make 


152  M0RTC4AGE  LOAN  VALUES 

jiidieioiis  inquiries  as  to  tliese  inattors  of  persons 
who  have  a  probable  knowledge  of  the  faets,  as  the 
answers  to  such  inquiries  will  often  show  whether  or 
not  there  is  any  danger  of  an  jilteniplcd  ('\'asi()n  of 
this  law. 

Tliere  is  another  matter  whicli  is  of  the  same  general 
class  as  the  title  complications  referred  to  and  wliich 
may  be  mentioned  in  this  connection;  this  is  the  (pies- 
tion  of  identity,  the  identity  of  the  property  examined 
by  the  inspector  with  tliat  described  in  the  legal 
description  in  the  application,  and  the  identity  of  the 
person  who  executes  the  mortgage  and  receives  thi> 
proceeds  of  the  loan  with  the  person  who  owns  the 
property. 

This  is  so  vital  to  any  loan  value,  and  the  loss,  if 
any  is  suffered,  is  so  apt  to  l)e  a  serious  one,  that  it 
Avould  seem  to  be  unlikeh^  that  any  investor  or  lender 
would  neglect  to  have  the  facts  fully  determined,  but 
loss  and  trouble  because  of  mistaken  identity  occur  so 
infrequently  that  they  seem  never  to  be  expected  nor 
regarded  as  a  present  danger. 

There  is,  hoAvever,  a  great  deal  of  carelessness  in  this 
respect  on  the  part  of  botli  lenders  and  inspectors, 
who  seem  inclined  to  accept  statements  as  to  identity 
at  their  face  value  without  verifying  them,  often  ex- 
amining and  passing  upon  the  physical  value  of  any 
property  which  is  found  to  bear  the  proper  street 
number,  or  which  may  be  pointed  out  to  them  as  the 
property  offered  in  tlie  application,  and  accepting  as 
such,  any  person  who  may  introduce  himself  or  be 
introduced  under  the  name  of  the  owner. 

This  statement  may  appear  to  be  rather  an  extreme 


153 


154  .M()RT(;A(!E  loan  VALUES 

one  so  far  as  the  practice  of  a  niajoi-il y  of  lenders  is 
concerned,  l)ut  the  fact  llinl  Ili"i-e  is  a  great  deal  of 
carelessness  in  such  iiiatlers  is  attested  hy  the  snccess 
of  such  mortgage  h)an  s\\indh>rs  as  liave  used  false 
descriptions  and  false  personifications  to  accomplish 
their  purposes;  nearly  all  hmd  and  loan  swindles 
being  based  npon  insufficient  investigations  along  this 
line,  for  this  is  believed  to  be  and  probably  is  the  most 
vnlnerable  point  in  the  armor  of  the  intended  vic- 
tims. 

An}-  of  the  matters  that  may  require  a  jiersonal 
investigation  in  order  to  determine  whether  unfavor- 
able facts  exist  which  are  sugg  sted  bnt  are  not  clearly 
shown  will  be  open  to  one  sonrce  of  information  which 
should  not  be  overlooked.  This  may  be  called  the 
"neighborhood  knoAvlcdge."  This  is  especially  avail- 
able in  country  districts,  where  it  usually  reaches 
much  further  into  details  than  does  the  same  kind  of 
information  obtained  in  city  investigations,  and  while 
it  may  not  always  be  dependable  it  should  not  be 
ignored,  for  it  is  almost  sure  to  contain  some  kernels 
of  fact  and  some  suggestions  as  to  the  lines  of  inquiry 
which  may  be  pursued  with  profit  by  the  lender. 

This  "neighborhood  knowledge"  very  often  goes 
into  the  bona  fides  of  the  transaction;  it  may  show 
that  mis-statements  may  have  been  made,  such  for 
instance  as  that  the  proceeds  of  the  loan  are  not  likely 
to  be  used  for  the  purpose  stated  in  the  application, 
or  that  the  stated  cash  purchase  price  was,  in  fact,  an 
exchange  of  overvalued  properties,  or  it  may  develop 
certain  adverse  matters  which  have  not  been  pre- 
viously considered,  such  as  that  of  the  notary  having 


MORTGAGE  LOAN  VALUES      155 

an  interest  in  the  transaction  that  might  invalidate  it, 
or  of  tlie  total  cost  to  the  borrower  being-  an  anionnt 
which  wonld  constitute  usury  under  the  laws  of  the 
State  in  which  the  loan  is  to  be  made,  or  that  the  loan 
has  been  rejected  for  cause  by  other  investors. 

Any  small  bits  of  information  along  these  or  similar 
lines  which  serve  to  cast  a  doubt  upon  the  safety  or 
entire  desirability  of  the  loan  will  be  notice  to  fully 
competent  and  expert  attoi-neys  and  inspectors  which 
they  will  not  neglect  to  observe  if  they  are  well  fitted 
for  such  employment,  and  the  danger  to  the-  investor 
from  such  complications  is  thus  reduced  to  a  mini- 
mum. 


XXVI 

THE  PERSONAL  HAZARD  OF   THE  BORROWER 

What  has  been  spoken  of  in  these  eommenls  as  the 
personal  hazard  of  a  loan  goes  to  the  disposition  and 
ability  of  the  borrower  to  take  proper  care  of  his  obli- 
gations and  of  the  mortgaged  property  dm-ing  the  life 
of  the  loan,  and  to  repay  the  principal  when  the  loan 
matures. 

Some  investors  and  lenders  do  not  attach  any  great 
value  to  this  hazard ;  they  hold  to  the  opinion  that 
only  the  marketable  value  of  the  property  and  its  title 
can  be  depended  upon  to  make  the  loan  a  safe  one. 
They  also  hold  that  changes  of  ownership  are  so  fre- 
quent and  so  uncertain  that  a  good  personal  hazard 
of  today  may  be  a  poor  one  tomorrow,  and,  strictly 
speaking,  in  both  of  these  contentions  they  are  right. 

This  view,  however,  omits  the  consideration  of  cer- 
tain practical  and  human  features  of  the  business  and 
seems  to  be  rather  in  line  with  the  ancient  idea,  which 
is  a  wrong  one  but  which  still  lodges  in  the  minds  of 
a  few  persons,  that  the  interests  of  those  who  borro\A' 
and  those  who  lend  money  are  conflicting  ones.  Nor 
do  these  contentions,  although  technically  right,  dis- 
pose of  the  very  practical  fact  that  less  trouble  is 
actually  experienced  by  the  investor  with  the  average 
loan  that  starts  with  a  good  personal  hazard  than  with 
the  average  one  which  does  not  have  that  advantage. 

156 


MORTGAGE  LOAN  VALUES      157 

A  more  eomprehonsive  view,  perhaps,  is  one  which 
recognizes  the  fact  that  the  relations  of  the  lender 
and  borrower  may  be,  and  should  be,  both  liusinesslike 
and  friendly ;  that  the  terms  of  the  contract  should 
be  observed  and  enforced,  but  that  this  rule  is  a  gen- 
eral one,  and  that  there  may  sometimes  be  occasions 
when  its  strict  enforcement  would  work  an  unneces- 
sary hardship,  and  occasions  when  its  liberal  inter- 
pretation might  encourage  and  enable  an  unfortunate 
borrower  to  meet  his  obligations,  and  thus  prove  to  be 
the  most  satisfactory  policy  for  both  parties. 

This  last  view  regards  a  good  personal  hazard  as 
having  a  very  distinct  value — not  exactly  as  being  a 
necessary  part  of  the  security  itself,  but  rather  as 
being  something  which  is  added  to  it,  and  which  will 
go  to  make  an  otherwise  safe  loan  a  more  desirable 
one.  In  other  words  it  is  a  promise,  the  lack  of  which 
may  be  taken  as  a  warning  of  possible  defaults  in 
interest,  taxes,  and  insurance,  or  of  a  neglect  of  the 
propert}"  itself  which  might  result  in  a  depreciation 
of  its  value. 

It  also  recognizes  the  fact  that  there  is  seldom  or 
never  any  desire  on  the  part  of  the  lender  to  need- 
lessly distress  the  borrower,  but  that  unfortunately 
there  is  a  class  of  borrowers  who  are  disposed  to  take 
advantage  of  this  fact,  and  who  will  neglect  their  obli- 
gations to  such  an  extent  that  many  investors  and 
lenders  regard  their  connection  as  undesirable, 
although  their  business  may  appear  to  be  safe. 

It  is  true  that  the  actual  value  of  the  security  must 
be  ample  and  that  the  title  must  be  a  good  one,  but 
these  things  alone  do  not  insure  the  specific  perform- 


158      MORTGAGE  LOAN  VALUES 

ance  of  the  contract  and  the  avoidance  of  foreclosure; 
nor,  for  that  matter,  does  a  good  personal  hazard  do 
this,  but  it  does  add  something  to  the  ])i'()S]>e('l  of  the 
loan's  record  proving  to  be  a  satisfactory  one. 

At  the  outset  a  good  personal  hazard  lias  a  decided 
advantage,  for,  while  transfers  will, be  luoi-c  frequent 
under  some  conditions  and  less  so  under  others,  it  is 
estimated  that,  under  the  average  conditions  of  Real 
Estate  market  activities,  approximately  eighty-five 
per  cent  of  the  ordinary  classes  of  mortgaged  proper- 
ties have  no  change  of  ownership  during  the  life  time 
of  an  ordinary  five  year  loan ;  this  leaves  only  fifteen 
per  cent  in  which  there  are  such  changes,  and  although 
there  is  no  rule  that  either  good  or  bad  personal  haz- 
ards in  these  cases  will  follow  those  which  are  of  the 
same  character,  they  undoubtedly  do  have  a  tendency 
in  that  direction,  for  the  reason  that  men  deal  more 
often  than  otherwise  with  those  persons  who  belong 
to  the  same  class  with  which  they  themselves  asso- 
ciate, and  the  property  of  one  of  these  persons  is  more 
apt  to  be  known  to  and  to  appeal  to  another  of  the 
same  class,  just  as  the  well  kept  property  of  one  who 
is  thrifty  is  more  likelj'  to  attract  and  create  a  desire 
for  ownership  in  the  mind  of  another  thrifty  person 
than  it  does  in  that  of  one  who  is  himself  careless  and 
who  is  indifferent  to  its  well  kept  condition. 

The  condition  in  which  the  applicant  keeps  his 
property  and  the  reputation  he  has  achieved  among 
those  who  know  him  and  have  dealt  with  him,  for 
the  payment  of  his  obligations  without  resorting  to 
unreasonable  delays  or  contentions,  may  be  accepted 
by  the  lender  as  strong  evidence  of  the  habits  and 


:\rORTGAGE  LOAN  VALUES  159 

priiicii)h's,  Avliicli  will  probably  dominate  his  future 
actions. 

Aside  from  the  fact  that  good  personal  hazards  are 
more  apt  to  be  found  in  those  sections  where  good 
physical  hazards  are  the  rule,  social  distinctions  or 
rules  -which  apply  to  classes  are  of  little  value,  for  in 
considering  this  feature  of  the  loan  each  case  is  neces- 
sarily an  individual  one,  and  the  poor  negro  cotton 
farmer  may  be  found  to  be  a  better  personal  risk  than 
may  the  man  of  much  greater  wealth  and  standing 
who  relies  upon  his  position  in  life  to  excuse  his  lack 
of  prompt  performance ;  or  the  same  applicant  may 
prove  to  be  a  better  risk  in  a  case  where  he  has  an 
interest  in  the  property  over  and  above  his  financial 
interest,  even  if  his  holdings  are  small,  than  in  a  case 
where  he  has  no  such  additional  interest  in  the  prop- 
erty although  its  money  value  is  much  greater. 
V.For  example,  he  who  is  the  owner  of  rental  property 
may  be  indifferent  as  to  its  upkeep  and  at  a  pinch 
may  risk  its  sacrifice,  but  the  prap-erty  which  is  his 
and  his  family's  home  usually  has  for  that  I'cason  an 
added  value  in  his  eyes  which  disposes  liim  to  make 
extra  exertions,  if  necessary,  to  protect  it. 

As  to  the  question  of  the  borrower's  ability  to  take 
care  of  his  obligations  and  to  protect  his  interests, 
there  are  many  facts  which  will  serve  to  point  with 
reasonable  certainty  to  correct  conclusions;  for 
instance,  if  his  chief  dependence  is  upon  his  personal 
skill  and  ability,  either  physical  or  mental,  these 
should  not  be  found  to  fall  below  par  as  compared 
with  the  magnitude  of  his  undertakings,  and  in  sucli 
cases  his  age,  equipment,  industry  and  economy,  his 


160  ]\IORTGAGE  LOAN  VALUES 

success  or  failure  in  l)usiii('ss  matters  and  also  any 
financial  Ijiirdcns  A\lii(-li  he  may  carry,  such  as  expen- 
sive liabils  or  the  support  of  extravagant  and  non- 
producing  dependents,  should  be  taken  into  considera- 
tion. 

The  applicant  ma'y,  however,  and  often  does,  have 
resources  and  property  holdings  in  addition  to  the 
property  offered  as  security,  and  if  these  are  substan- 
tial in  character  and  sufficient  in  value  above  his 
indebtedness  that  fact  may  in  some  degree  lessen  the 
importance  which  might  attach  to  a  personal  hazard 
which  is  without  such  material  helps.  But  it  should 
be  remembered,  when  considering  this  feature,  that 
character  is  a  more  dependable  possession  than  wealth, 
and  that  the  owner's  property  holdings  may  easily 
exceed  his  ability  to  manage  them  profitably. 

Careful  inquiries  and,  when  possible,  personal 
observations  should  always  be  made  to  determine  the 
personal  risk  that  may  go  with  each  loan ;  and  if 
direct  knowledge  is  not  obtainable  and  answers  to 
inquiries  only  must  be  depended  upon,  it  must  be 
remembered  that  such  answers  should  come  from  the 
best  and  most  disinterested  sources  which  may  be 
available,  and  that  conclusions  should  be  drawn,  if 
possible,  from  a  concensus  of  opinions  rather  than 
from  that  of  any  individual,  for  neighborliness  or 
other  interest  in  the  applicant's  success  in  getting  a 
loan  often  unduly  colors  such  answers  and  opinions. 
The  investigator  should  also  be  fully  aware  of  the 
fact  that  he  must  not  expect  to  get  any  answers  that 
may  be  inimical  to  the  interests  of  the  applicant  if 
the  applicant  or  his  agent  is  present  at  tlie  time. 


MORTGAGE  LOAN  VALUES      161 

In  the  case  of  farm  loans  a  direct  knowledg'e  of 
the  facts  is  more  avaihil)le,  and  the  inspector,  in  addi- 
tion to  making  judicious  iiuiuiries,  ahvays  can  and 
shouki  report  upon  tlie  personal  hazard  which  is 
shown  by  the  condition  and  care  of  the  buildings, 
fences,  implements,  live  stock,  etc.,  and  the  general 
state  of  cultivation  of  the  land  itself,  for  from  such 
observations  very  dependable  conclusions  may  be 
drawn. 

All  of  these  matters  should  be  kept  in  mind,  but 
among  the  various  things  that  go  to  indicate  the  haz- 
ard, perhaps  the  most  important  one  is  the  purpose 
for  which  the  proceeds  of  the  loan  are  to  be  used. 

A  very  common  use  for  the  money  is  as  a  part  of 
the  purchase  price  of  the  property  offered  as  security, 
and  in  many  cases  this  use  is  very  favorable  to  the 
hazard;  another  very  common  use  is  the  making  of 
betterments  to  the  property  mortgaged,  and  this  is 
also  favorable  if  the  loan  asked  for  is  upon  tlie  basis 
of  the  value  of  the  property  before  the  betterments 
are  made. 

Other  good  uses  for  the  proceeds  of  a  loan  may  be 
the  purchase  of  other  real  or  personal  property  which 
will  add  an  amount  to  the  borrower's  net  income  in 
excess  of  any  interest  he  has  to  pay  for  the  use  of  the 
money;  or  the  money  may  be  needed  for  the  purpose 
of  prosecuting  or  enlarging  an  already  successful 
business,  or  for  the  refunding  of  other  debts,  when  at 
the  same  time  the  borrower  is  reducing  his  total 
indebtedness.  On  the  other  hand,  there  are  many 
purposes  for  which  money  is  sought  to  be  borrowed 
which  should  cause  the  lender  and  investor  to  hesitate. 


162     MORTGAGE  LOAN  VALUES 

for  they  may  cither  indicate  a  bad  business  manage- 
ment of  the  applicant's  affairs  in  the  past,  or  con- 
tcm])latc  investments  which  are  more  in  the  nature  of 
new  li;il)ilities  tlum  of  additional  assets. 


XXVII 

IRRIGATED   LAND 

Another  matter  to  which  special  attention  should 
be  called  is  that  of  irrig-ation,  for  the  business  of  lend- 
ing money  npon  the  socnrity  of  mortgag;  s  upon  irri- 
gated lands  is  one  which  is  seldom  fully  nnderstood 
by  those  who  have  confined  their  operations  to  those 
sections  in  which  the  rainfall  alone  is  depended  npon 
to  supply  the  agricultural  needs. 

While  no  very  comprehensive  discussion  of  this 
subject  is  possible  here,  the  mention  of  a  few  of  the 
more  important  conditions  which  are  peculiar  to  such 
lands  and  to  land  loans  in  cases  where  the  value  of 
the  land  depends  largely  upon  its  artificial  irrigation, 
may  give  the  miinfornied  person  a  clearer  idea  of  the 
subject  and  a  l)etter  knowledge  of  the  lines  along 
which  investigations  should  be  made  when  this  class 
of  securities  is  to  be  considered.  As  these  matters  are 
not  always  understood,  the  following  facts  are  given 
as  affording  some  basis  for  their  study. 

Large  sections  of  our  country  are  either  arid  or 
semi-arid  and,  in  others  the  rainfall,  while  sufficient 
in  quantity,  is  not  well  distributed  for  agricultural 
purposes.  In  much  of  this  territory,  however,  the 
land  is  so  rich  in  all  of  the  other  necessary  con- 
stituents  for   the    production   of   crops   that   by   the 

163 


IRRIGATION    CANAL 


164 


MORTGAGE  LOAN  VALUES  IG-l 

addition  of  the  needed  amcMint  of  water  it   can  be 
made  to  yield  most  abnndantly. 

Experience  has  shown  that. one  of  the  most  impor 
tant  factors  in  the  fertility  of  the  soil  is  that  of  the 
proper  content  of  water  and  that  in  many  eases  it  is 
possible  to  control  this  excess  or  defect  in  moistnre  by 
drainage  when  it  is  excessive  and  by  diverting;  water 
from  streams  or  pnmping  it  from  beneath  the  snrface 
onto  the  land  when  it  is  lacking. 

The  agricnltnral  valne  of  irrigation  has  long  passed 
the  experimental  stage  and  while  mnch  may  yet  be 
learned  as  to  the  Ix-st  methods  of  nsing  it,  the  general 
benefit  to  be  gained  by  its  nse  when  needed  is  no 
longer  a  matter  of  any  doubt  nor  is  there  any  question 
but  that  intelligently  made  loans  upon  irrigated  lands 
are  as  satisfactory  to  the  investor  as  any  oHiers. 

The  fact  is  well  recognized,  however,  by  those  who 
are  experienced  in  this  class  of  secnritirs  that  their 
proper  selection  requires  a  fair  general  knowledge  of 
the  subject  of  irrigation  insofar  as  it  may  affect  such 
loans  or  the  territory  under  consider'ation,  for  lend- 
ing upon  these  securities  has  certain  peculiar  fea- 
tures, and  losses  may  easily  result  from  the  lender 
acting  upon  an  insufficient  knowledge  of  the  subject. 

For  instance,  the  land  and  water  together  ma>-  be 
ample  security  for  the  proposed  loan,  althougli  the 
land  alone  may  be  wholly  inadequate  security,  but 
mortgages  are  made  upon  the  lands  only  and  this  in- 
troduces a  complication,  for  while  the  title  to  these 
includes  the  buildings  and  other  improvements 
thereon  together  with  the  irrigation  ditches,  etc.,  Ihe 
title  to  the  water,  if  it  is  from  a  floAving  strfVTm,  is  a 


IGfi  MORTGAGE  LOAN  VALUES 

separate  tiling,  and  its  nse  in  eonneetion  with  the  land 
is  subject  to  certain  rules  and  conditions  foi-  "water 
flowing:  upon  the  surface  of  the  earth  is  neither  land 
nor  Icnement"  and  is  not  susceptible  of  absolute 
owiieisliip  and  the  mortgagor  can  only  assign  sudi 
rights  as  he  may  have  in  it  as  collateral  security. 

But  notwithstanding  these  facts,  the  availability  of 
irrigation  Avater  to  l)e  had  u.pon  satisfactory  and  de- 
pendable conditions  enhances  the  actual  value  of  the 
land  upon  Avhich  it  can  be  used  with  profit,  just  as 
the  nearness  of  markets,  good  roads,  and  neighbor- 
hood development  generally  may  add  very  materially 
to  its  value  although  the  title  to  the  land  does  not 
carry  with  it  any  enforcible  claim  of  title  in  them. 

Flowing  water  is  the  property  of  the  owners 
through  or  between  whose  land  it  flows,  subject,  how- 
ever, to  the  rights  of  other  riparian  proprietors  above 
or  below,  although  when  separated  from  the  body  of 
which  it  constituted  a  part,  it  may  be  bought  and  sold 
like  other  commodities. 

The  waters  of  a  stream  flowing  through  the  public 
lands  are  a  part  of  the  public  domain  but  after  the 
general  government  has  parted  with  the  title  to  the 
soil  the  right  to  control  the  use  of  such  waters  passes 
to  the  State  Avhere  they  flow  and  various  acts  of  Con- 
gress and  the  statutes  of  various  States  bear  upon  this 
subject,  with  the  main  object,  it  would  seem,  of  the 
establishment  and  definition  of  what  are  known  as 
priority  rights. 

As  this  doctrine  of  prior  rights  grew  out  of  the 
local  rules  and  customs  of  miners  and  was  based  upon 
the  wants  of  the  community  and  the  peculiar  social 


MORTGAGE  LOAN  VALUES      167 

and  industrial  conditions  lof-ally  prevailing  to  wlii 'li 
the  rules  of  the  coninion  law  were  at  first  considered 
inapplicable,  the  interpretation  of  the  acts  and 
statutes  governing  thrs?  mattors  have  necessarily 
required  many  decisions  from  tlie  courts  in  determin- 
ing the  rights  under  the  law  of  the  claimants  to  tlie 
use  of  water. 

This  question  of  the  priority  of  the  water  right  goes 
further,  however,  than  simply  to  its  legal  status  and 
extends  to  the  amount  of  water  available  under  any 
such  right  as  may  exist,  compared  with  tlie  amount 
needed  for  practical  purposes  by  the  irrigation  system 
which  it  is  expected  to  supply. 

The  first  right  to  the  use  of  water  may  be  a  perma- 
nent one,  held  absolutely,  or  it  may  be  subject  to  cer- 
tain conditions,  restrictions,  and  reservations  but  in 
anv  case  it  takes  precedence  of  all  subsequent  appro- 
priations, for  these  secondary  rights  must  not  inter- 
fere with  the  right  of  a  prior  taker  to  have  the  full 
benefit  of  his  appropriation,  and  one  who  goes  upon  a 
stream  and  diverts  the  water  from  it  is  bound  to  take 
notice  of  all  prior  appropriations. 

It  is  not  the  intention,  however,  to  go  into  a  dis- 
cussion of  the  legal  features  of  irrigation  projects  and 
mention  has  only  been  made  of  the  above  facts  in 
order  to  show  that  the  right  to  take  and  use  water  for 
this  purpose  involves  legal  questions  which  should  not 
be  carelessly  passed  upon  but  which  should  be  sub- 
mitted to  the  judgment  of  a  competent  local  attornc}'. 

Preliminary  to  even  the  most  superficial  knowledge 
of  the  subject  of  irrigation  the  investigator  must,  of 
course,  understand  the  meaning  of  the  terms  which 


168  :\IORTGAGE  LOAN  VALUES 

are  comiudiily  iisj'd  in  discussinf;  it,  <m(l  ;if  first  lie 
may  be  somowluH  confused  hy  the  fad  1li;i1  different 
measurements  are  used  to  indicate  tlic  anioiuit  of 
water  that  is  used  or  is  available— these  are  niiu'i-'s 
inches,  second  feet,  and  acre  feet,  and  ni;iy  be  defined 
as  follows : 

A  Miner's  Inch  is  the  flow  of  water  throuu'h  a  liole 
one  inch  square  with  a  four  incli  head — it  is  nicasui-ed 
by  placing  a  lioard,  in  which  there  is  a  hole  one  inch 
sqnare  across  a  stream  so  tliat  it  will  "backup"  and 
maintain  a  depth  of  four  inches  of  water  above  the 
hole.  Neither  the  factor  of  time  nor  of  amount  of 
water  enter  into  this  measurement,  for  it  was  origi- 
nally designed  solely  for  the  use  of  miners  \\\\o  were 
only  concerned  with  the  size  of  the  stream  and  the 
force  of  the  flow. 

In  applying  the  measure  to  the  flow  of  water  for 
irrigation  purposes,  however,  the  factor  of  time  is 
introduced,  and  it  has  been  found  that  the  miner's 
inch  flow  per  niinnte  of  reasonably  clear  water  Avill 
be  approximately  nine  gallons. 

A  Second  Foot  is  a  cubic  foot  of  water  passing  a 
given  point  in  one  second  of  time — it  is  equivalent  to 
50  miner's  inches  and  is  calculated  to  give  a  result  of 
450  gallons  per  minute ;  it  is  used  in  measuring  the 
flow  of  larger  streams  as  the  miner's  inch  is  used  for 
the  smaller  ones.  The  second  foot  flow  of  a  stream  is 
usually  measured  from  a  weir  or  dam. 

An  Acre  Foot  is  43,560  cubic  feet  or  about  325,829 
gallons  and  is  equivalent  to  a  twelve  inch  rainfall  over 
an  acre  of  ground.     In  point  of  time  the  acre  foot  is 


MORTGAGE  LOAN  VALUES      169 

usually  calculated  as  an  annual  distribution  and  cal- 
culated by  weight  will  exceed  1,300  tons. 

One  gallon  contains  231  cubic  inches,  one  cubic  foot 
contains  1,728  cubic  inches  or  7.48  gallons,  one  acre 
contains  43,560  superficial  feet  or  6,272,640  square 
inches  and  the  following  calculations  will  show 
(theoretically)  the  results  to  be  obtained  in  the  dis- 
tribution according  to  its  measurements  of  water  on 
the  land. 

One  miner's  inch  in  a  24  hour  run  over  one  acre  is 
equal  to  .471  inches  of  rainfall,  2.1  miner's  inches 
being  equal  to  a  one  inch  rainfall,  and  25.2  miner's 
inches  equal  to  twelve  inches  of  rainfall.  One  miner's 
inch  flowing  continuously  for  one  year  will  afford 
water  sufficient  to  cover  one  acre  of  ground  to  a  depth 
of  14.1  feet.  One  second  foot  or  fifty  miner's  inches  in 
a  24  hour  run  per  acre  would  equal  23.89  inches  of 
rainfall  and  one  second  foot  in  constant  flow  and 
evenly  distributed  over  160  acres  would  equal  54 
inches  of  rainfall,  but  these  calculations  are  all 
theoretical  and  fail  to  take  into  account  certain  prac- 
tical facts  which  very  materially  reduce  the  amounts 
actually  obtained  at  the  points  of  contact  with  the 
roots  of  the  plants  for  whose  benefit  it  is  intended. 

The  reductions  which  must  be  made  from  the  above 
estimates  are  due  to  many  causes  and  often  amount 
to  as  much  as  50%  of  the  measured  flow.  First, 
nearly  all  water  taken  from  streams  carries  silt  and 
other  foreign  substances  which  greatly  retards  its 
flow;  second,  the  loss  owing  to  evaporation  is  very 
great,  especially  in  the  hot  and  dry  climates  where 
irrigation  is  chiefly  used ;  third,  there  is  much  loss 


170  IMORTGAGE  LOAN  VALUES 

from  S(M']);i<i:(',  ospocially  in  llic  use  of  eartli  conduits; 
fourtli,  tlicro  is  waste  from  saturation  at  points  of 
distribution. 

Tn  many  instances  Avater  is  immix'd  from  wells  oi- 
under<i'i'ound  sujjplies  (unless  flowing  wells  may  be 
had)  and  sometimes  from  iionds,  lakes  or  artificial 
reservoirs.  This  adds  to  tlie  cost  of  irrigation  the 
expense  of  using  artificial  power  instead  of  gravit}' 
but  it  usually  has  the  advantage  of  the  supply  having 
a  greater  head  and  being  nearer  to  the  point  of  dis- 
tribution and  also  of  clearer  water  (it  also  avoids  the 
danger  from  the  seeds  of  noxious  weeds  which  are  apt 
to  be  carried  by  the  open  stream). 

A  larger  head  and  volume  will  overcome  some  of 
the  losses  above  noted  and  100  inches  of  water  will  be 
more  effective  on  100  acres  than  will  50  inches  on  50 
acres.  At  the  point  of  distribution  onto  the  land  a 
tight  soil  will  absorb  less  water  than  will  a  loose  soil 
and  cement  flumes  or  pipes  are  sometimes  used  for 
mains  with  metal  or  canvas  pipes  or  hose  to  convey 
the  water  over  the  land.  All  of  these  things  result  in 
economy  in  the  use  of  water  and  sometimes  bring  the 
efficiency  of  the  water  supply  up  to  nearly  its  meas- 
urement capacity. 

The  investigator  should  also  have  some  knowledge 
of  Avhat  is  called  the  "duty  of  water."  He  should 
understand,  however,  that  this  term  does  not  indicate 
that  any  given  results  can  be  expected  from  the  appli- 
cation of  a  certain  amount  of  water  to  a  certain  quan- 
tity of  land,  otherwise  he  may  make  the  mistake  of 
adopting  arbitrary  rules  in  this  matter,  for  in  prac- 
tice it  will  be  found  that  the  kind  and  texture  of  the 


MORTGAGE  LOAN  VALUES     171 

soil  and  sub-soil  will  affect  the  proportion  of  effi- 
ciency between  equal  supplies  of  w^ater  and  also  that 
the  relative  amounts  needed  for  the  various  crops 
differ  greatly,  and  that  the  amount  which  is  found  to 
be  ample  in  some  cases  will  fall  far  short  of  the  neces- 
sary amount  in  other  cases  (where  either  the  texture 
of  the  land  or  the  crop  to  be  irrigated  is  different)  ; 
but  the  "duty  of  water"  as  it  may  be  affected  by 
existing  conditions  should  be  understood  by  him  in 
order  that  he  may  be  able  to  judge  as  to  whether  or 
not  the  supply  is  sufficient  for  general  agricultural 
uses  on  the  kind  of  land  irrigated,  or  whether  it  is 
limited  to  the  amount  necessary  for  special  purposes 
only. 


XXVIII 


DRAINAGE 


It  is  the  intention  of  these  eommeiits  lo  discuss 
briefly  the  more  general  matters  and  the  more  per- 
tinent questions  which  may  arise  from  a  consideration 
of  the  subject  that  is  indicated  by  the  sub-title.  In 
this  case  tlie  subject  of  drainage  is  of  importance  to 
mortgage  loan  values  and  gains  interest  because  it  is 
in  many  features  the  converse  of  the  preceding  com- 
ment on  irrigation. 

A  more  comprehensive  view  of  this  can  probably 
be  had  if  the  question  is  regarded  as  being  more  truly 
upon  the  subject  of  providing  farm  land  with  the 
proper  content  of  water,  whether  the  desirable  con- 
tent is  in  excess  or  in  deficiency  of  what  it  should  be 
in  order  to  insure  a  potentiality  in  crop  producing 
that  would  not  otherwise  exist.  This  subject  then 
may  properly  be  considered  as  pertinent  to  either,  or 
rather  to  both  comments. 

Land  which  in  its  normal  state  may  be  arid  or  semi- 
arid  and  also  be  in  a  sense,  unproductive  of  profit- 
able crops,  may,  under  favorable  conditions  be  re- 
deemed by  irrigation.  This  matter  has  been  touched 
upon  in  the  preceding  comment.  An  excessive  oppo- 
site condition  is  often  found  in  other  considerable 
areas  where  drainage  is  required,  and  which  for  this 
reason  may  be  as  wholly  unproductive  of  ordinary 

172 


MORTGAGE  LOAN  VALUES      173 

agricultural  crops  as  are  the  arid  aud  semi-arid  lands, 
when  witliout  the  aid  of  irrigation. 

In  many  parts  of  the  country,  then,  large  sections 
of  land  exist  where  the  character  of  the  surroundings 
and  the  low  elevation  are  such  as  to  hold  for  extended 
periods  of  time,  the  water  which  collects  and  impreg- 
nates the  land  that  it  covers.  The  total  area  of  such 
land  is  estimated  to  be  approximately  155,000  square 
miles,  about  one-third  of  which  is  only  periodically 
overflowed.  All  of  such  lands,  however,  are  generally 
classed  as  swamp  lands  and  are  often  reclaimed  by 
the  building  of  gravity  drainage  canals  or  the  dredg- 
ing of  their  natural  outlets  which  were  originally 
supplied  by  streams.  The  large  excess  of  water  usu- 
ally found  in  swamp  or  bog  lands  is  generally  caused 
by  precipitation  or  by  the  supply  which  is  collected 
there  from  streams  or  springs  which  have  no  suffi- 
cient outlet,  or  from  the  overflow  of  nearby  swamps 
and  from  percolation  from  adjacent  wet  lands. 

The  necessity  for  the  drainage  of  any  land  whether 
by  natural  or  by  artificial  means  extends  to  the  area 
covered  by  the  limits  of  all  agricultural  lands  and 
affects  a  vastly  larger  area  than  does  swamp  land 
drainage  or  its  converse,  irrigation. 

In  this  comment  the  consideration  of  this  matter 
lias  dealt  chiefly  with  the  two  extremes  in  water  con- 
ditions and  has  kept  in  mind  the  larger  areas  which 
have  been  so  affected.  The  total  area  of  agricultural 
lands  which,  in  their  normal  state,  are  either  too  wet 
or  too  dry  for  profitable  farming  although  redeem- 
able, is  much  less  than  is  the  area  of  the  lands  where 


174  IMORTGAGP]  LOAN  VALUES 

a  (Icpcndcncc  is  placed  upon  a  sufficient  average  rain- 
faill. 

The  average  annual  rainfall  in  any  })articu]ar  sec- 
tion is  in  a  degree  dependable  foi-  calculation,  but  to 
hope  that  it  will  be  distributed  in  a  desirable  way  is 
to  hope  for  a  great  uncertainty.  In  almost  every  sec- 
tion and  in  almost  everj^  year  there  may  be  found  dis- 
tricts and  seasons,  where  the  rainfall  may  have  been 
undesirably  heavy  or  undesirably  light  as  measured 
by  the  requirements  of  the  crops.  The  only  relief 
from  this  condition  seems  to  be  by  drainage  and 
farmers  in  many  of  those  sections  where  the  threat 
of  the  season 's  uncertainty  is  not  imminent,  adopt 
the  plan  of  open  ditches.  This  plan  often  gives  them 
some  relief  and  recommends  itself  to  many,  for  its 
original  cost  is  so  much  less,  although  its  upkeep  is 
greater  than  tile  drainage  as  it  requires  more  frequent 
attention. 

The  unqualified  success,  of  any  irrigation  or  drain- 
age plan  rests  upon  the  presence  of  sufficient  crop 
producing  elements,  and  upon  the  lack  of  any  in- 
jurious elements  such  as  the  acids  and  alkalies.  With 
an  underground  drainage,  however,  even  these  defects 
may  be  cured. 

The  need  of  artificial  drainage  to  supply  the  re- 
quirements of  natural  conditions  extends  to  all  parts 
of  this  important  area  and  the  character  and  amount 
of  such  drainage  varies  w^ith  the  different  conditions 
of  elevation,  climate,  topography,  rainfall,  character 
of  soil,  sub-soil,  etc.  A  discussion  of  drainage  would 
■  be  a  Useless  undertaking  were  it  made  in  the  hope  of 


MORTGAGE  LOAN  VALUES      175 

mentioning  all  the  conditions  tliat  mip'lit  arise  even 
in  a  limited  territory. 

It  is  almost  nniversally  Icnown  that  tlie  removal  of 
the  excess  water  from  agricultnral  lands  is  desirable 
and  that  the  fundamental  requirements  for  its  re- 
moval are  both  simple  and  easily  understood.  There- 
fore, no  discussion  of  the  subject  seems  profitable 
except  to  mention  the  fact  that,  while  surface  drain- 
age is  sometimes  the  only  drainage  that  is  practical, 
it  is  never  quite  as  satisfactory  or  effective  as  is  the 
plan  of  underground  drainage  which  can  almost  al- 
ways be  used  in  supplying  the  local  and  lateral  needs. 
This  plan  of  underground  drainage  has  many  ad- 
vantages; it  is  more  effective  in  collecting  and  car- 
rying the  water,  it  does  not  interfere  with  the  plow- 
ing and  cultivating  of  the  land,  and  its  use  also  leaves 
the  sub-soil  in  a  more  friable  and,  hence,  more  pro- 
ductive condition. 

This  last  change  does  not  occur  quickly  but  it  is 
gradually  accomplished  by  the  water  percolating 
through  the  ground  to  the  tile  and  thus  it  often  makes 
the  higher  land  softer  and  better  su]>plied  with  the 
necessary  quantity  of  moisture  than  are  the  lower  ly- 
ing and  naturally  wetter  lands. 

A  tendency  to  surface  erosion  can  also  be  relieved 
and  sometimes  entirely  overcome  by  supplying  the 
land  with  sufficient  underground  drainage,  as  this 
will  relieve  the  surface  from  a  heavy  accumulation  of 
water  and  provide  for  its  passing  away  below  instead 
of  upon  the  surface  of  the  land.  Lands  that  are 
eroded  will  always  be  injured  and  their  loan  value 
may  be  wholly  destroyed  by  continued  erosion.     It  is 


176  :\IORTGAGE  LOAN  VALUES 

therefore  evident  that  no  subject  is  of  more  impor- 
tance than  is  the  one  of  proper  drainage: — this  is 
true  "whether  it  be  the  drainage  of  city  pi-oix-rty,  or 
the  drainage  of  agricultural  sections. 

The  application  of  some  knowledge  of  this  subject 
is  also  of  use  in  considering  mortgage  loan  values,  for 
proper  drainage  is  always  conducive  to  better  health 
and  to  better  living  conditions,  for  the  occupants  of 
either  class  of  property  as  Avell  as  to  greater  produc- 
tiveness of  the  soil. 


The  Public  Domain 

The  English   System    and 

Measuies. 
Other  Measurements. 
The  Spanish-French  Land 

Measures. 
Metric  System  Land  Meas- 
ures, 
Spanish- Mexican  Land 

Measures. 
Texas  Land  Measures. 
State  and  Congressional 

Surveys. 
Subdivisions. 
Fradional  and  Irregular 

Divisions. 
Illustrations  of  Land 

Divisions. 


177 


XXIX 


THE  PUBLIC  DOMAIN 


The  importance  to  llie  iiivestov  of  accurate  legal 
(les'-riptions  cannot  be  over-estimated,  for  the  title  to 
land  carries  witli  it  the  title  to  the  buildings  and  all 
else  wliich  nuiy  belong  to  it ;  and  its  legal  description 
thus  definilely  fixes  the  location  of  the  entire  security. 

Although  the  physical  value  of  the  ground  may  only 
constitute  a  small  part  of  the  total  value  of  the  whole 
property,  in  every  instance  it  is,  in  a  sense,  the  most 
important  part  of  the  security  offered.  Each  separ- 
ate parcel  of  land  has,  or  should  have,  a  legal  descrip- 
tion -which  will  clearly  and  positively  identify  it  and 
set  it  apart  from  all  other  lands,  and  which,  in  con- 
nection with  tlie  general  surveys,  will  show,  at  least 
approximately,  its  shape  and  area.  This  is  usually 
the  case,  but  in  practice  it  is  found  that  absolute 
accuracy  in  these  matters  is  not  always  possible  except 
by  re-survej's  and  under  certain  circumstances  is 
not  possible  even  b.y  this  means. 

It  is  very  important  then  that  those  persons  who 
are  concerned  with  the  selection  of  Real  Estate  secu- 
rities should  be  fully  able  to  understand  land  descrip- 
tions, although  it  is  unfortunately  true  that  to  many 
persons  such  descriptions  are  practically  meaningless, 
and  that  attorneys  who  profess  to  examine  titles  some- 
times take  it  for  granted  that  the  description  recited 

178 


MORTGAGE  LOAN  VALUES      179 

ill  the  absli-act  pi-opcrly  locates  and  deseril)es  the  land 
intended  to  be  eonveyed  or  mortgaged,  when  a  careful 
examination  of  the  deseri])tioii  might  show  it  to  be  a 
seriously  faulty  one. 

Differences  in  land  divisions,  descriptions  and 
measurements  will  be  encountered  in  various  sections 
of  the  countrj^  differences  that  are  largely  due  to 
the  fact  that  various  parts  of  what  is  now  the  United 
States  were  originally  under  the  sovereignty  of  dif- 
ferent states  and  countries  which  were  rather  liberal 
in  the  matter  of  land  grants  and  whose  systems  of 
land  measurements  and  divisions  Avere  very  dissimilar. 

When  these  titles  go  back  to  the  original  grants,  the 
differences  in  them  often  prove  to  be  somewhat  con- 
fusing to  those  persons  whose  experience  has  been 
confined  to  the  land  descriptions  in  use  in  a  different 
part  of  the  country.  If  the  investor's  business  is  con- 
fined to  a  particular  locality  it  is  perhaps  sufficient 
for  his  needs  that  his  kllo^^iedge  of  land  descriptions 
should  also  be  confined  to  that  locality.  It  is  not 
intended,  however,  that  these  comments  shall  be 
limited  to  aaiy  single  section  of  territory  but  that  they 
shall  be  of  use,  if  possible,  to  investors  in  any  section, 
and  an  effort  will  be  made  to  outline  the  principal 
facts,  for  unless  such  facts  concerning  any  land  under 
consideration  are  known  and  understood  neither  its 
area  nor  its  location  can  be  positively  determined  nor 
can  its  title  be  properly  examined.  A  general  knowl- 
edge of  the  public  divisions  of  lands,  of  the  surveys 
by  which  their  location  has  been  (established,  of  the 
measurement  by  which  their  dimensions  are  known 
and  also  of  the  variations  and  exceptions  to  general 


180     MORTGAGE  LOAN  VALUES 

miles  which  ai-c  likclx-  lo  he  rdiiiul  in  the  territory 
under  consideration,  is  always  necessaiw  to  good  work 
on  the  part  of  cither  the  inspector  or  the  title  attor- 
ney ;  and  for  this  reason  a  l)rief  outline  of  the  history 
of  these  matters,  together  with  the  tal)les  which  show 
the  various  measurements  used,  maj'  perhaps  afford 
the  best  foundation  for  a  discussion  of  the  subject. 

In  an  early  day  Florida  was  a  Spanish  possession ; 
England  held  dominion  over  the  territory  to  the  north 
of  Florida  as  far  west  as  the  IMississippi  River,  north 
to  the  Ohio  and  then  east  of  the  Alleghanies  to  the 
French  settlements  on  the  St.  Lawrence.  France  laid 
claim  to  Louisiana  (except  during  the  interval  be- 
tw^een  1760  and  1800  when  it  was  under  the  dominion 
of  Spain).  This  was  then  a  great  fan-shaped  terri- 
tory, broadening  to  the  north  and  extending  from  the 
settlements  at  the  mouth  of  the  Mississippi  and  cov- 
ering about  one  and  a  quarter  millions  of  square  miles 
of  the  area  now  within  the  boundaries  of  the  United 
States.  At  this  time  another  vast  territory  in  the 
southwest,  covering  nearly  a  million  square  miles, 
including  Texas,  belonging  to  Spain  and  afterwards 
to  Mexico,  while  to  the  north  of  this  and  west  of  the 
Rocky  Llountains  yet  another  quarter  of  a  million 
square  miles,  which  was  known  as  the  Oregon  terri- 
tory, was  in  dispute  between  Russia,  France  and 
England,  and  later  between  England  and  the  LTnited 
States. 

By  the  Revolutionary  War  the  Colonies  gained  pos- 
session of  the  territory  then  held  l)y  England  east  of 
the  Mississippi  River  and  south  of  the  present  bound- 
ary between  Canada  and  the  United  States;  this  also 


MORTGAGE  LOAN  VALUES      181 

included  what  was  at  that  time  called  tJie  "Territory 
Northwest  of  the  Ohio"  which  England  liad  pre- 
viously gained  from  France. 

The  territorial  lands  thus  gained  by  the  Colonies 
from  England  were  not  at  first  held  in  common  by 
them,  but  certain  portions  were  claimed  by  the  various 
Colonies  by  reason  of  the  military  services  of  their 
colonial  troops,  Virginia  and  New  York  each  claim- 
ing the  whole,  and  Massachusetts  and  Connecticut 
parts  of  the  territory  northwest  of  the  Ohio ;  Massa- 
chusetts laid  claim  to  that  territory  which  is  now 
the  State  of  Maine,  Georgia  to  that  lying  to  the  west 
of  it  as  far  as  the  Mississippi  River,  South  Carolina 
to  a  strip  to  the  north  of  this,  and  New  York  and  New 
Hampshire  claimed  what  is  now  the  State  of  Ver- 
mont. Tennessee  was  a  part  of  the  original  State  of 
North  Carolina,  and  West  Virginia  and  Kentucky 
were  parts  of  the  original  State  of  Virginia. 

In  the  year  1803  the  United  States  purchased  the 
Louisiana  territory  from  France ;  in  1819  it  purchased 
Florida  from  Spain ;  in  1835  Texas  achieved  her  inde- 
pendence from  Mexico,  and  in  1845  was  annexed  to 
the  United  States;  in  1846  England  finally  gave  up 
her  claims  to  the  Oregon  territory  lying  south  of  the 
49th  degree  of  latitude  (the  present  international 
boundary),  and  by  the  treaty  of  Guadalupe  Hidalgo 
in  1848  and  the  Gadsden  purchase  in  1854,  Mexico 
ceded  to  the  United  States  the  territory  embraced 
within  the  present  limits  of  California,  Arizona, 
Nevada  and  Utah  and  parts  of  New  Mexico,  Colorado 
and  Wyoming;  and  thus  the  present  boundaries  of 
the  United  States  were  formed. 


182  MORTGAGE  LOAN  X'ALUES 

Meanwhile,  soon  after  tlie  foi'niation  of  our  general 
government,  the  Colonies  wliich  came  into  the  Union 
as  landed  proprietoi-s  liad  ('('(hMl  llicii-  oiilsidc  holdings 
(except  about  six  thousand  siiuacc  miU's  chuiued  by 
Connecticut  in  what  is  now  the  northeastern  part  of 
Ohio  and  which  has  since  been  known  as  the  Western 
Reserve)  to  the  General  Government,  and  in  1784  a 
system  of  Square  Survey,  which  had  been  invented 
by  Thomas  Jefferson,  was  favorably  reported  to  the 
Congress  and  was  adopted  and  put  into  use  but  was 
not  finally  perfected  until  about  the  year  1820. 

This  system  has  since  been  used  in  the  public  divis- 
ions of  all  of  the  lands  belonging  to  the  United  States 
which  had  not  been  previously  surveyed  according  to 
some  other  plan,  but  as  it  has  always  been  the  policy 
of  governments  to  reward  their  soldiers  by  land 
grants  and  to  encoiu-age  settlements  in  their  domin- 
ions, especially  at  those  places  which  for  commercial 
or  defensive  reasons  were  regarded  as  important,  and 
as  lands  were  sold  and  assigned  to  many  persons  and 
in  many  places  in  pursuance  of  this  policy,  it  has  fol- 
lowed that  such  land  ownerships  not  only  cover  the 
territory  embraced  in  the  original  States  but  that 
they  also  exist  in  many  other  different  and  widely 
separated  parts  of  the  country,  and  the  title  to  these 
lands  having  emanated  from  the  then  existing  govern- 
ment under  whose  dominion  they  lay,  they  were 
marked  out  and  described  according  to  the  s^^stems  of 
survey  and  measurement  then  in  use  liy  that  govern- 
ment. The  present  system  of  government  surveys  has 
not  been  made  to  apply  to  these  lands  except  as  to 
some  small  portions  and  to  Indian  Grants  where  it 


MORTGAGE  LOAN  VALUES      183 

has  sometimes  been  made  to  overlay  the  original  sur- 
veys, but  the  Government  recognizes  and  protects  tlr,^ 
titles  which  have  come  through  other  sovereignties, 
although  many  of  such  lands  are  illy  defined  and 
bounded  only  by  natural  objects.  These  land  divi- 
sions are  very  generally  of  irregular  shapes  and  at 
best  very  little  preference  seems  to  have  been  given  to 
the  cardinal  points  of  the  compass  in  establishing  their 
lines.  Among  the  States,  however,  Georgia  was  an 
exception  to  tliis  rule,  for  in  portions  of  this  State  a 
system  of  square  land  divisions  had  been  in  use  for 
about  fifty  years  prior  to  the  adoption  by  the  general 
government  of  what  we  call  the  "Congressional  Sur- 
vey," the  entire  State  being  finally  covered  by  such 
State  Surveys  except  in  the  territory  lying  to  the  east 
of  the  Oconee  River  where  the  lands  were  mostly 
deeded  in  regular  shaped  headriglits  and  Military 
Grants. 

Texas  may  also  be  mentioned  as  an  exception  inas- 
much as  immense  tracts  which  had  been  granted  to 
railroads  and  many  large  private  claims  were  sur- 
veyed by  the  State  in  mile  square  sections,  corre- 
sponding to  that  extent  to  the  Government  plan ;  they 
were  not  based  upon  the  township  and  range  plan, 
however,  and  are  described  bj^  number  in  blocks. 

The  above  historical  outline  is,  of  course,  a  very 
meager  one,  but  it  should  be  sufficient  to  indicate  to 
the  investigator  the  differences  which  may  exist  in 
different  sections  and  the  importance  of  a  thorough 
examination  into  such  matters  in  any  territory  with 
which  he  is  not  already  familiar,  for  as  pointed  out  in 
Warvelle  on  Abstracts :     ' '  Upon   confirmation  it  is 


184     MORTGAGE  LOAN  VALUES 

necessary  to  have  these  titk's  traced  out  and  fixed  by 
survey  or  re-survey,  according  to  the  peculiarities  of 
the  system  of  the  government  from  which  they  orig- 
inated, and  incidentally  they  must  frequently  be 
referred  to  in  subsequent  conveyances  and  subdi- 
visions. ' ' 


XXX 

THE  ENGLISH  SYSTEM   AND   MEASURES 

The  linear  measures  which  are  in  by  far  the  most 
general  use  in  the  United  States  conform  to  the  stand- 
ard established  by  the  English  government.  In  fact, 
this  system  is  the  one  which  has  been  used  over  ap- 
proximately nine-tenths  of  the  total  area  of  the  coun- 
try, although  Texas  with  its  two  hundred  and  sixty- 
five  thousand  square  miles  of  territory  and  also  many 
other  comparatively  small  allotments  and  grants 
located  at  various  places  from  the  eastern  coast  of 
Florida  to  the  western  coast  of  California  are  meas- 
ured according  to  the  Spanish-Mexican  system,  and 
many  others  scattered  over  the  territory  which  was 
once  under  the  dominion  of  France  are  measured  ac- 
cording to  the  old  French  system. 

It  is  evident  then  that  he  who  is  charged  with  the 
investigation  of  lands  or  land  titles  may,  if  his  terri- 
tory is  extensive,  be  brought  into  contact  with  the 
peculiarities  of  systems  other  than  that  of  England 
and  the  United  States. 

An  understanding  of  the  system  of  measurements 
by  which  any  lands  have  been  surveyed  or  set  apart 
is,  of  course,  absolutely  necessary  as  a  basis  for  any 
intelligent  idea  of  such  divisions,  and  a  ready  famil- 
iarity wnth  the  measures  of  extension  and  land  sur- 
faces in  use  in  the  territory  where  loans  are  to  be 

185 


186     MORTGAGE  LOAN  VALUES 

considered  is  llierefore  a  matter  of  primary  import- 
ance. 

In  measuriiijj:  lines  and  tlistanccs,  surveycn's  nse 
what  is  known  as  a  Gunter's  chain;  this  consists  of  a 
metal  chain  four  )-ods  or  sixty-six  feet  in  length,  made 
up  of  one  hundred  links,  each  of  which  is  seven  and 
ninet3'-two  hundredths  inches  in  length. 

Superficial  or  square  measui-es  have  naturally  de- 
veloped from  these  measures  of  extension,  and  as  they 
serve  the  purpose  of  defining  the  areas  and  contents 
of  land  without  the  necessity  of  making  calculations 
to  determine  them,  a  knowledge  of  superficial  meas- 
ures is  of  at  least  as  much  importance  and  is  perhaps 
more  frequently  of  service  in  land  investigations  than 
is  the  knowledge  of  the  linear  measurements  upon 
which  they  are  based. 

NOTE 

Although  the  fact  may  be  of  little  or  no  practical 
use  to  the  investigator  of  lands  or  land  titles,  it  is 
nevertheless  of  interest  to  know  that  while  measure- 
ments were  anciently  based  upon  such  indefinite 
things  as  hand-breadths,  spans  and  paces,  they  have 
since  been  very  generally  standardized  upon  what  are 
believed  to  be  definite  and  unchangeable  facts. 

For  instance,  the  French  meter,  which  is  the  unit  ()f 
the  present  French  system  and  equals  39.37  English 
inches,  is  supposed  to  be  one  ten-millionth  part  of  the 
distance  from  the  equator  to  either  pole,  and  the  nauti- 
cal mile,  which  contains  6086.07  feet  and  equals 
1.152664  English  miles,  is  based  upon  one  minute  of 
longitude  at  the  equator. 

The  English  standard,  which  has  been  adopted  by 
Parliament  and  is  recognized  by  law  in  the  United 


MORTGAGE  LOAN  VALUES      187 

States,  is  based  upon  the  length  of  a  pendulum  which 
will  oscillate  once  in  each  exact  second  of  time  by 
reason  of  the  attraction  of  gravitation,  which  is  con- 
stant. 

A  brass  pendulum  at  621/0  degrees  temperature 
which  will  do  this  was  found  to  measure  39.1393 
inches  by  the  inch  measurement  then  in  use  (which  is 
said  to  have  been  anciently  based  upon  the  length  of 
three  barley-corns  placed  end  to  end)  and  this  pendu- 
lum was  adopted  as  the  standard  of  measurements, 
twelve  of  these  39.1393  parts  being  declared  to  be  one 
foot  and  thirty-six  of  them  to  be  an  imperial  yard. 

In  practice  it  is  becoming  more  common  to  reduce 
all  linear  land  measurements  to  feet  and  inches  and 
all  superficial  land  measures  to  square  feet  and  inches 
in  city  lots  and  to  acres  and  hundredths  in  rural  prop- 
erty, by  the  following  tables  of  English  linear  and 
square  measures  which  are  still  in  general  use  in  de- 
fining distances  and  in  computing  the  area  and  con- 
tents of  land : 


188 


MORTGAGE  LOAN  VALUES 


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XXXI 

OTHER  MEASUREMENTS 

SPANISH-FRENCH  LAND  MEASURES. 

(Facts  and  Tables  taken  from  Warvelle  on  Abstracts). 

During  tlie  administration  of  the  Spanish-French 
governors,  in  tlie  pi'ovince  of  Lonislana,  the  granting 
power  of  the  royal  domain  was  freely  exercised,  and 
the  grants  so  made  lie  at  the  foundation  of  most  of 
the  early  titles  in  the  States  subsequently  formed 
from  that  province. 

The  surveys  of  these  grants  are  found  in  many 
places  wrought  in  with  our  public  surveys,  present- 
ing, as  it  were,  curious  mosaic  irregularities  in  strik- 
ing contrast  with  the  simple  rectangular  system 
adopted  by  the  national  government.  They  illustrate, 
in  a  forcible  manner,  the  peculiar  agrarian  systems  of 
the  governments  which  preceded  us,  in  the  diversified, 
irregular  forms  of  grants,  from  urban  in-lots.  and 
out-lots,  rural  tracts  of  inconsiderable  dimensions,  and 
from  thence  increasing  in  extent  to  7,056  arpents  or  a 
league  square,  the  "arpent''  of  Paris  being  the  stand- 
ard of  provincial  measurement. 

The  following  is  a  comparative  statement  adopted 
by  the  surveyor  general's  office  at  St.  Louis,  Mo.,  of 
the  land  measures  of  the  L^'nited  States,  and  the 
French  measures  formerly  used  in  the  province  of 
Louisiana : 

191 


192  MORTGAGE  LOAN  VALUES 

OLD  FRENCH  LINEAR  MEASURE 

French    United  States 

Chains.  Links. 

1  perche  equals 0.     29.166 

10  perche  equals  one  arpent  lineal  or.       2.     91.666 

10   arpents     "       29.     16.666 

100        "  "       291.     66.666 

1000         "  "       2916.     66.666 

The  side  of  a  league  square  equals  84  arpents  equal 
245  chains.  The  side  of  a  mile  square  equals  27  ar- 
pents equal  80  chains. 

1  perche=about  1  rd.  4.166  links  or  19.25  ft. 
1  arpent=about  11  rd.  16.66  links  or  192.5  ft. 

OLD  FRENCH  SUPERFICIAL  MEASURE 

French Ignited  States 

Arpents.  Acres. 

1  equivalent  to 0.85  07 

2  1.70  14 

3  2.55  21 

4  3.40  28 

5  4,25  35 

6  5.10  42 

7  5.95  49 

8  6.80  56 

9  7.65  63 

10  8.50  69 

100    85.06  94 

i;000    850.69  44 

10,000    8,506.94  44 


MORTGAGE  LOAN  VALUES      193 

OLD  FRENCH  SUPERFICIAL  MEASURE 

(Continued). 

Arpents.                          Perches.  Acres. 

1 and 17.551 equal 1. 

2 35.102 2. 

3 52.653 3 

4 70.204 4. 

5 87.755 5. 

7 05.306 6. 

8 22.857 7. 

9 40.804 8. 

10 57.959 ■  9. 

11 75.510 10. 

117 55.102 100. 

1,175 51.020 1,000. 

11,755 10.204 10,000. 

A  square  league  contains  7,056  arpents  or  6,002.50 

acres. 
A   square   mile   contains   725   arpents   32.64   perches 

or  640  A. 

THE  METRIC  SYSTEM  OF  LAND  MEASURES. 

Consideration  of  the  metric  system  (sometimes 
called  the  French  system)  is  not  strictly  applicable 
to  this  discussion,  for  the  reason  that  it  was  not  in 
use  prior  to  the  time  when  the  United  States  acquired 
sovereignty  over  the  lands  formerl}^  owned  by  Fi-ance, 
but  tables  of  it  are  entered  here  for  purposes  of  com-, 
parison  and  for  the  reason  that  its  use  was  legalized 
by  act  of  Congress  in  1866  and  that  it  is  actually  in 


194  MORTCJAdE  LOAN  VALUES 

use  l)y  the  United  States  coast  survey  and  ^vill  i)r()l)a- 
l)ly  1)('  more  extensively  used  for  other  pui-poses  in 
llie  future  than  it  is  at  present. 

The  meter  is  sup])()sed  to  be  one  ten-millioiilh  i)art 
of  the  distance  fi-om  the  equator  to  cillicr  i)ok', 
measured  on  tlie  earth's  surface  at  sea  level.  It  is 
about  39.37  inches  and  is  the  pi-imary  iiiiil  of  length. 

The  square  meter  is  the  unit  of  surface  measures 
and  is  called  a  centidrc;  it  is  about  10%  square  feet, 
or  1  1/5  square  yards. 

The  Are  (Ar)  is  a  square,  each  of  whose  sides  is 
ten  meters  in  length  and  is  the  unit  of  land  measures. 

TABLE  OF  LINEAR  MEASUREMENTS. 

10  millimeters^  1   centimeter^O.3937  inches. 

10  centimeters=l  decimeter=3.937  inches. 

10  decimeters=l  Meter^S  ft.  3.37  inches. 

10  meters=l  dekameter=32  ft.  7.7  in.,  or  nearly  2 

rods. 
10  dekameters^l  hectometer=328  ft.  1  in.  or  nearly 

20  rods. 
10  hectometers=l  kilometer=0. 62137  miles. 
10  kilometers^l  m3'riameter=6.2137  miles. 

TABLE  OF  SQUARE  SURFACE  MEASURES 

100  square  millimeters=l   sq.  eentimeter=:0.155  sq. 
inches. 

100  square    centimeters^  1    sq.    decimeter  ==15.5    sq. 

inches. 
100  square  deeimeters=l  sq.  meter  or  centiare. 


MORTGAGE  LOAN  VALUES  195 

1    ('entiare=15r)0    scj.    in.~"ab()ut    IQi/^    sq.    ft.=: 

1.196  sq.  yds. 
100  centiai*es=:l  are   (ar)  =119.6  sq.  yds.=:nearly  4 

sq.  rds. 
100  ares=l  heetare^2.471  acres. 

SPANISH-MEXICAN  LAND  MEASURES 

Scattered  over  tliis  district  (formerly  belonging  to 
Mexico)  there  exist  many  ancient  Spanish-Mexican 
titles,  mnnicipal  and  rural,  which,  under  the  terms  of 
the  treaties,  are  recognized  and  protected  by  the  gov 
ernment.  These  claims  and  grants  were  made  for 
agricnlture,  mining,  stock-raising,  and  colonization, 
and  in  all  sizes  from  a  village  lot  to  a  million-acre 
tract. 

The  Surveyor  General  of  California,  in  a  report 
made  in  1851,  states  that  all  grants  in  California, 
made  either  by  the  Spanish  government,  or  that  of 
Mexico,  refer  to  the  "vara"  of  Mexico  as  the  measure 
of  length,  and  that  by  common  consent,  in  California, 
that  measure  is  considered  as  exactly  equivalent  to 
thirty-three  American  inches.  It  would  seem  that 
another  length  is  given  to  the  "vara"  by  ]\Ir.  Alexan- 
der, who  states  its  length  to  be  equal  to  92.741  per  cent 
of  the  American  yard  (this  being  the  approximate 
length  of  the  Texan  vara,  or  33  1/3  inches).  In  prac- 
tice, however,  the  General  Land  Office  has  sanctioned 
the  recognition,  in  California,  of  the  Mexican  vara  as 
being  equivalent  to  thirty-three  American  inches. 

The  Mexican  vara  is  the  unit  of  all  the  measures  of 
length,  the  pattern  and  size  of  which  are  taken  from 


196      MORTGAGE  LOAN  VALUES 

the  Castiliau  vara  of  the  mark  of  Burgos,  and  is  the 
legal  vara  used  in  the  IMexiean  republic.  P"'ifty  Mexi- 
can varas  make  a  measure  which  is  called  cordel,  Avhich 
instrument  is  used  in  measuring  lands. 

The  legal  league  contains  100  cordels,  or  5,000 
varas,  which  is  found  by  mulitiplying  by  100  the  50 
varas  contained  in  a  cordel.  The  league  is  divided 
into  two  halves  and  four  quarters,  this  lieing  the  only 
division  made  of  it.  Half  a  league  contains  2,500 
varas,  and  a  quarter  of  a  league  1,250  varas. 
Anciently,  the  Mexican  league  was  divided  into  three 
miles,  the  mile  into  a  thousand  paces  of  Solomon,  and 
one  of  these  paces  into  five-thirds  of  a  Mexican  vara, 
consequently  the  league  had  3,000  paces  of  Solomon. 
This  division  is  recognized  in  legal  affairs,  but  has 
been  a  very  long  time  in  disuse — the  same  as  the  pace 
of  Solomon,  which  in  those  days  was  called  vara,  and 
was  used  for  measuring  lands.  The  mark  was  equival- 
ent to  two  varas  and  seven-eighths — that  is,  eight 
marks  containing  twenty-three  varas — and  was  used 
for  measuring  lands. 

It  will  be  observed  that  the  Texan  vara  is  slightly 
longer  than  the  standard  recognized  in  California  and 
adopted  by  the  General  Land  Office. 

The  following  is  a  list  of  land  measures  adopted  by 
the  IMexican  government  (with  free  translation  and 
approximate  equivalents  in  hektares  and  acres)  : 

1  caballeria^about  42.8  hektares  or  107.94  acres. 
1  hektare=2.47  acres. 
Hacienda    (plantation),    25,000    by    5,000    varas    or 


MORTGAGE  LOAN  VALUES      107 

125,000,000    sq.    vrs.=8778+    liektaresz=205.1+ 
caballerias=abont  22,000  acres. 

Sitio  de  ganado  mayor  (or  league)  (cow  ranch,  pas- 
ture land),  5,000  by  5,000  varas  or  25,000,000  sq. 
vrs.=l,755.61+  liektares=41-|-  caballerias=: 
4,428.4+  acres. 

Sitio  de  ganado  menor  (sheep  ranch),  3,333  1/3  by 
3,333  1/3  varas  or  11,111,111  1/9  sq.  vrs.=^ 
780.27+  hektares=  18.23+  caballerias=l,9fi8+ 
acres. 

Criadero  de  ganado  mayor  (cattle  breeding  ranch), 
2,500  by  2.500  varas  or  6,250,000  sq.  vrs.=448 
hektares=10.25+  caballerias^l,107+  acres. 

Criadero  de  ganado  menor  (sheep  breeding  ranch), 
1,666  2/3  by  1,666  2/3  varas  or  2,777,777  4/9 
sq.  vrs.^l99.13+  hektares=4.55+  caballerias=:r 
492+  acres. 

Labor  (field,  arable  land),  1,000  by  1.000  varas  or 
1,000,000  sq.  vrs.=70.22+  hektares=1.64+ 
caballerias=  177%  acres. 

Fundo  legal  para  pueblo  (legal  town  site),  1,200  bv 
1,200  varas  or  1,440,000  sq.  v,s.=101.12+ 
hektares=2.36+  caballerias=255+  a?res. 

Caballeria  de  tierra  (knighthold  of  land),  1.104  by 
552  varas  or  609,408  sq.  vrs.=43.7+  hektares= 
1  caballeria  =  107.94+  acres. 

Media  caballeria  (half  a  knighthold  of  land),  552  bv 
552  varas  or  304,704  sq.  vrs.=21.8+  hektares= 
.5  caballerias=r53.97+acres. 


198     MORTGAGE  LOAN  VALUES 

Cuarto  (•al)alloria  or  suerte  de  tierra  (quarter  of  a 
knighthold  of  land),  552  by  276  varas  or  152,532 
sq.      vrs.=10.9+      liektares=.25      caballerias:^: 

26.98+  acres. 

Fanega  .senibradura  de  maiz  (sowing  ground  for  one 
fanega  of  corn),  276  by  184  varas  or  50,784  sq. 
vrs.=3.65-[-  hektares==.08  1/3  caballerias^^9 
acres. 

Solar  para  casa,  moulin  o  venta  (site  for  house,  mill, 
or  inn),  50  by  50  varas  or  2,500  ^q.  vrs.=. 175561 
liektares;=.004  caballerias=:.44  acres. 


MORTGAGE  LOAN  VALUES      199 


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XXXII 

STATE  AND  CONGRESSIONAL  SURVEYS 

The  United  States  contains  something  more  than 
three  million  square  miles  of  territory ;  roughly  speak- 
ing, thirteen  and  one-half  per  cent  of  this  consists  of 
grants,  donations,  head-rights,  and  private  claims 
derived  from  the  sovereignty  of  England,  or  from  the 
various  States.  These  parcels  of  land  are  principally 
confined  within  the  limits  of  the  original  States  and 
are  of  little  uniformity  either  in  size  or  shape,  and 
their  boundaries  are  usually'  defined  by  natural  ob- 
jects or  by  "neighborhood"  descriptions. 

Ten  per  cent  of  the  total  area  consists  of  lands,  the 
divisions  and  legal  descriptions  of  which  are  either 
wholly  or  in  part  those  of  the  Spanish-French  or 
Spanish-Mexican  territory  to  which  they  originally 
belonged.  These  lands  are  found  in  many  States  and, 
as  previously  stated,  in  widely  separated  localities, 
although  by  far  the  greater  portion  are  in  one  body 
which  covers  the  entire  State  of  Texas. 

This  State,  which  was  formerly  a  part  of  Mexico, 
has  adopted  a  plan  of  rectangular  surveys  for  some 
of  its  western  and  northwestern  territory.  It  has. 
however,  retained  the  Spanish  system  of  measurements 
by  varas  instead  of  adopting  the  English  system  which 
has  been  adopted  by  all  of  the  other  States  and  by 
the  United  States  government.     Under  this  plan  the 

200 


MORTGAGE  LOAN  VALUES      201 

lands  are  divided  into  what  are  called  sections  and 
these  are  grouped  into  blocks.  These  sections  con- 
tain 3,612,800  sqnare  varas  each  (640  acres)  and  are 
usually  square  in  form,  each  side  being  1900.8  varas 
(one  mile)  in  length  and  lying  square  with  the 
cardinal  points  of  the  compass. 

About  one  and  one-half  per  cent  of  the  total  area 
of  the  United  States  is  included  in  the  State  surveys 
of  Georgia,  which  are  regular  in  form  although  not 
uniform  in  size,  and  cover  the  entire  State  with  the 
exception  of  the  lands  lying  north  of  the  Altamaha 
River  and  east  of  the  Oconee  River,  which  lands  are 
included  in  the  above  mentioned  thirteen  and  one- 
half  per  cent  in  which  no  regular  State  or  Government 
surveys  have  been  made.  In  this  State  soon  after  the 
3*ear  1733  something  near  220,000  acres  were  divided 
int)  regularly  shaped  tracts  of  50  acres  each  and 
as  this  was  the  earliest  regular  division  of  land  by 
public  authority,  the  Georgia  state  surveys  are  en- 
titled to  especial  mention  as  probably  having  first 
called  attention  to  the  advantages  of  some  such  sys- 
tem and  led  eventually  to  the  adoption  of  our  present 
congressional  survey.  There  are  now  five  different 
plans  of  divisions  by  public  survey  in  this  State  and 
in  each  of  these  sections  the  land  is  divided  into  dis- 
tricts w^hich  have  designations  by  numbers  as  Land 
or  Militia  districts.  Each  of  these  districts  is  again 
divided  into  lots  which  are  numl^ered  with  uniformity 
as  to  that  district  but  with  little  uniformity  as  be- 
tween the  different  districts — that  is  to  say,  that  the 
lots  ma}'  be  numbered  from  north  to  sonth  in  one  dis- 
trict and  from  east  to  west  in  an  adjoining  district. 


202  MORT(JAr;E  LOAN  VALUES 

Across  tlie  north  (Mid  of  the  Stale  thei-e  are  several 
counties  comprising  wliat  was  i'oi-iiicrly  known  as  the 
Cherokee  Strip  wliere  tlie  survey  has  been  made  of 
lots  lying  square  N\ith  tlie  compass  and  measuring  160 
rods  on  each  side;  they  contain  160  acres  each;  and 
in  a  few  counties  in  this  district  (chiefly  in  Bartow 
County),  where  there  were  supposed  to  be  gold  de- 
posits, lands  were  surveyed  into  lots  lying  square  with 
the  compass  and  measuring  80  rods  on  each  side;  they 
contain  40  acres  each. 

Extending  westward  from  the  Oconee  River  to  the 
Ocmulgee  River  and  in  some  places  to  the  Flint 
River  the  land  has  been  surveyed  into  lots  lying  with 
their  corners  to  the  cardinal  points  of  the  compass 
and  measuring  180  rods  on  each  side;  they  contain 
2021/t  acres  each. 


The  southern  portion  of  the  State  is  surveyed  into 
lots  lying  square  with  the  compass  and  measuring  280 
rods  on  each  side ;  they  contain  490  acres  each. 
Scale  1/16  in.=10  rds. 


MORTGAGE  LOAN  VALUES 


203 


The  remainder  of  the  State  has  been  surveyed  into 
lots  lying  square  with  the  compass  and  measuring  200 
rods  on  each  side;  they  contain  250  acres  each. 


380  RD5. 


^SOA. 


Approximately  seventy  per  cent  of  the  entire  area 
of  the  United  States  has  been  surveyed  according  to 
the  government  system  of  rectangular  surveys,   and 


N. 


200  ROS. 


5CALt     '46  in. »  10  RDS. 

an  additional  five  per  cent  is  embraced  within  the 
limits  of  the  territory  that  is  subject  to  this  survey, 


204  MORTGACIE  LOAN  VALUES 

but  Avhicli  lies  chiefly  in  the  iiUMiiilaiiioMs  i-('<>:i()ns  of 
the  West  and  has  not  been  surveyed. 

This  government  system  of  public  land  s  uvcxs,  to 
which  seventy-five  per  cent  of  the  total  ai-ea  is  sub- 
ject, contemplates  square  divisions  of  six  miles  on  each 
side  called  townships,  each  of  which  contains  as  nearly 
as  may  be  23,040  acres.  These  to^vnships  are  usually 
spoken  of  as  ''congressional  townships"  to  distinguish 
them  from  the  Civil  townships  into  whi'-h  the  counties 
of  many  of  the  States  are  divided  for  the  purpose  of 
local  government,  and  are  divided  into  3(5  sections, 
each  supposed  to  be  one  mile  square  and  to  contain 
640  acres. 

The  Section  is  the  unit  of  this  system  and,  although 
its  subdivision  is  contemplated,  such  sulxli vision  by 
actual  survey  and  monuments  is  not  always  required 
by  law  as  a  part  of  the  government  system. 

The  framework  of  this  system  consists  of  base  lines 
which  are  run  on  true  parallels  of  latitude,  and  longi- 
tudinal lines  which  are  called  principal  meridians, 
each  of  which  is  designated  by  a  name  oi"  number. 
Parallel  to  the  base  lines  (of  which  there  are  twenty- 
three)  other  lines  are  run  which  are  called  standard 
parallels  and  correction  lines,  and  lines  are  also  run 
parallel  to  the  principal  meridians  (of  which  there 
are  thirty).  These  are  called  guide  meridians  or 
auxiliary  meridians.  These  lines  are  necessarily  of 
more  frequent  occurrence  in  mountainous  than  in 
more  level  country,  but  always,  of  course,  they  form 
squares  or  parallelograms  which  are  then  surveyed 
into  townships.  These  townships  are  designated  by 
numbers  north  or  south  from  the  base  line  as  "town- 


MORTGAGE  LOAN  VALUES 


205 


ships,"  and  by  numbers  east  or  west  from  the  eon- 
trolling  meridian  line  as  "ranges." 

The  following  diagram  will  show  this  system  of 
numbering  and  identifying  townships: 


■i 

OP 

1 

5 

UJ 

z 
a: 

ui 

a 

Z 

lU 

(J 

Z 

1 

TVWP.     J  N. 

TVYP.    aN. 

«A«E. 

LINE 

m 

TWP.     IN. 

TYtP. 

IS. 

3.   5. 

i^^ 

M 

TYirP. 

TVf R      3  S. 

TWP. 

M.S. 

< 
o 

^ 

> 

1. 

1           2 

i 

z 

DCALE    »/ib  IN.' 80CH,      ^ 

^ 

206 


MORTGAGE  LOxVN  VALUES 


Any  number  of  contiguous  townships  lying  to  the 
oast  or  west  of  one  anotlier  are  given  "townsliip" 
nunil)ers,  ami  any  nuni])er  of  contiguous  townships 
lying  to  the  north  or  south  of  one  another  are  given 
"range"  numbers — to  illustrate,  the  shaded  township 
marked  "A"  would  be  designated  as  Township  One 
North,  Range  Two  p]ast,  and  the  shaded  township 
marked  "B"  would  be  designated  as  Township  Two 
South,  Range  Three  AVest.  By  this  system  any  dupli- 
cation is  imp()ssil)le  if  the  names  or  inuiibers  of  the 
controlling  base  and  meridian  lines  are  also  given. 

The  sections  into  which  each  congressioual  township 


<i 


i 

0 

5 

H 

3 

1 

1 

7 

d 

9 

10 

w 

12 

15 

n 

16 

15 

m 

13 

19 

20 

ai 

22 

23 

2^ 

50 

;i9 

2$ 

^1 

2b 

25 

:>\ 

52 

Z>5 

:>H 

d5 

:>& 

5CALe  'Ai  IN.'  I  M. 


:\[ORTGAGE  LOAN  VALUES 


207 


is  divided  are,  with  a  feAV  exceptions,  nuiul)ered  from 
one  to  thirty-six,  commencing  with  tlie  one  in  the 
northeast  angle  of  the  township  and  extending  west 
and  east  alternately  to  section  thirty-six  in  the  south- 
There  are  numerous  exceptions  to  this  rule,  how- 
ever, some  of  which  are  due  to  the  impossilnlity  of 
always  making  the  rule  conform  to  the  conditions  and 
others  to  the  fact  that  some  of  the  surveys  were  made 
before  the  system  Avas  perfected;  an  important 
example  of  the  latter  class  of  exceptions  occurs  in  the 
territory  east  of  the  Great  Miami  River  and  west  of 
east  angle  as  shown  bv  the  foregoing  diagram  : 


N. 


3b 

30 

2^ 

n 

12 

b 

35 

39 

23 

n 

II 

5 

Jf 

^^ 

01 

16 

10 

M 

33 

27 

21 

\5 

9 

^ 

31 

;b 

20 

/M 

? 

1 

31 

25 

W 

13 

7 

1 

5CALt    '/a  m. »  LM. 


208     MORTGAGE  LOAN  VALUES 

the  military  grants  and  head-i-iglils  jjrcvioiisly  sur- 
veyed in  what  is  now  the  State  of  Oliio  ;  in  this  district 
the  townships  are  laid  out  and  their  locations  desig- 
nated as  controlled  by  certain  base  and  meridian  lines, 
but  the  sections  are  numbered  ns  follows,  beginning 
at  the  southeast  corner  of  the  township : 

A  knowledge  of  such  variations  from  the  general 
rules  which  may  prevail  in  the  territory  where  his 
loans  are  to  be  made  is  of  importance  to  the  investor, 
for  without  it  he  may  find  himself  at  a  loss  when 
investigating  lands  or  land  titles;  for  example — Sec- 
tions 11,  21,  and  31  are  the  only  sections  whose  loca- 
tion in  the  township  is  the  same  under  either  of  the 
above  systems  of  numbering,  while  Section  36  is  in 
the  southeast  angle  in  one  case  and  in  the  northwest 
angle  in  the  other,  and  a  description  of  the  southeast 
quarter  of  Section  One  and  the  northeast  quarter  of 
Section  twelve  in  a  given  township  in  a  district  where 
the  regular  system  of  numbering  had  been  used  would 
show  contiguous  quarter  sections,  while  the  same  sec- 
tional description  in  the  district  where  this  exception 
exists  would  show  two  separate  quarter  sections 
located  six  miles  from  one  another. 

Another  matter  which  may  be  mentioned  in  this  con- 
nection, which  is  a  rule  however  instead  of  an  excep- 
tion, is  that  of  "School  Lands";  since  as  early  as  the 
year  1785  it  has  been  the  fixed  policy  of  the  govern- 
ment to  set  apart  certain  lands  for  the  support  and 
encouragement  of  education,  and  it  has  been  its  prac- 
tice to  select  one  or  two  sections  in  each  township  for 
this  purpose  (usually  Section  10  in  the  States  east  of 
the  Missouri  River  and  Sections   16  and  36  in  the 


MORTGAGE  LOAN  VALUES      209 

newer  States  lying  west  of  these),  and  it  has  been 
made  a  part  of  the  agreement  of  each  State  on  its 
admission  into  the  Union  tliat  tlie  proceeds  of  these 
sections  or  other  lands  known  as  "lieu"  lands  shall 
be  devoted  to  the  support  of  the  public  schools. 


XXXI II 


SUB-DIVISIONS 


Under  onr  government  system  of  piil)lic  surveys 
certain  subdivisions  of  sections  are  defined  by  law, 
l)ut.  so  far  as  the  actual  government  survey  is  applied 
to  su])divisions  of  (luarter  sections,  they  are  desig- 
nated l)y  imaginary  lines  only;  the  shape  and  area  of 
these  sul)divisions  (when  i-egular)  are  shown  by  the 
folloAving  diagram  : 


N.W.  V4 

H-t.'M 

Nl  VX 

HXt.  'N 

ME.'/M. 

N.E  '/4 

ijOA. 

^oA. 

SOA. 

S.ry  V^ 

Sf..'M 

5 '/a 

HW  V^ 

N.T/  Vw 

N.E  Va 

40  A. 

WOA, 

SOA. 

YiVn 

E  V^ 

5.W.  '/^ 

5.E  1/4 

It^H 

IbO  A. 

«0A. 

80  A. 

5CALE     5  IN.«   SOCtt. 

210 


MORTGAGE  LOAN  VALUES      211 

It  will  be  apparent  that  any  rectangular  system  of 
survey  will  lend  itself  readily  to  a  similar  system  of 
subdivision  and  that  if  the  original  survey  is  a  public 
one  of  record,  liie  legal  descriptions  of  the  subdivi- 
sions of  the  various  tracts  of  which  it  is  composed  will 
be  simplified  and  each  will  indicate  on  its  face  the 
approximate  shape  and  contents  of  the  sul)division. 
The  above  plan  of  subdivision  is  therefore  very  gener- 
ally used  in  all  such  cases,  whether  the  survey  is  a 
public  or  a  private  one.  (In  cases  where  the  sides  of 
the  tracts  do  not  conform  to  the  cardinal  points  of  the 
compass  there  is  naturally  a  variation  in  the  descrip- 
tion used  from  that  of  the  one  used  in  the  govern- 
mental plan — for  instance,  the  halves  and  quarters  of 
the  2021/^  acre  lots  of  central  Georgia  are  described  as 
the  northwest  one-half  of  the  east  quarter,  etc.,  of  the 
particular  lot  in  which  it  is  located.) 

There  are,  however,  seldom  any  other  public  sub- 
divisions made  of  farming  lands  except  those  which 
are  made  of  the  mile  square  survey  above  shown.  In 
cities  and  towns  it  is  of  course  necessary  that  much 
smaller  divisions  of  the  lands  should  be  made  and 
these  are  known  as  "additions,"  "divisions,"  "sub- 
divisions," "blocks"  and  "lots,"  which  are  projected 
upon  a  "plat"  and  are  identified  by  names  and  num- 
bers; the  plats  of  these  additions  with  their  minute 
subdivisions  when  accepted  and  recorded  under  the 
laws  of  the  State  where  they  are  located  become  a 
legal  record,  showing  the  identity  of  the  property  in 
question,  its  location,  shape  and  dimensions,  and  the 
former  description  by  section  and  township  is  then 


212     MORTGAGE  LOAN  VALUES 

seldom  used  except  for  the  purpose  of  additional  cer- 
tainty in  locating  the  property. 

It  is  evident,  therefore,  that  in  city  investigations 
the  local  official  plat  is  of  primary  importance  for, 
although  there  is  usually  a  much  greater  regularity 
and  uniformity  of  detail  in  the  plat  of  a  city  or  town 
which  has  been  established  subsequent  to  a  more  gen- 
eral public  survey  of  the  lands  upon  which  it  is 
located,  than  there  is  in  that  of  one  which  had  its  be- 
ginnings along  the  windings  of  a  water  course  or  at 
a  crossing  of  trails,  there  are  in  no  case  any  general 
rules  which  are  of  much  value  in  such  investigations, 
for  State  laws  and  City  ordinances  govern  these  mat- 
ters and  often  leave  much  to  the  decision  of  the  per- 
son who  submits  the  plat  of  the  proposed  addition  or 
subdivision. 

The  use  of  official  township  or  district  plats  is  also 
often  quite  important  in  rui-al  investigations,  and  this 
is  the  case  even  in  those  districts  which  have  been 
surveyed  according  to  some  regular  plan,  for  there 
are  certain  unavoidable  conditions  that  necessarily 
result  in  numerous  variations  from  the  calculated 
results  of  any  system. 

For  instance,  the  contents  of  each  of  the  several 
tracts  which  result  from  the  subdivision  of  a  "con- 
gressional" township  is  presumably  of  the  acreage 
named  on  the  above  diagram,  but  natural  obstacles, 
such  as  navigable  lakes  and  rivers,  are  frequently  en- 
countered in  these  surveys  and  this  results  in  certain 
tracts  failing  to  conform  in  size  or  shape  to  the  regu- 
lar plan;  such  parts  of  the  survey  are  known  as 
"fractional"    sections     or     quarter    sections.       The 


MORTGAGE  LOAN  VALUES 


213 


smaller  of  these  tracts  within  the  boinidarics  of  a 
section  are  usually  called  "lots,"  but  tlise  and  also 
those  which  have  been  formed  by  throwing  together 
fragmentary  parts  of  different  sections  are  some- 
times called  "plats."  All  of  these  are  described  as 
fractional  parts  and  ar(>  numbered  in  a  consecutive 
order,  usually  as  nearly  as  may  be  in  the  order  in 
which  sections  are  numbered. 

The  rule  which  is  followed  in  such  cases  is  illus- 
trated by  the  following  diagram  : 


N.     5 

NV> 

^       o 

"«                    N.W.  V4 

ao  A 

N.t.'/a 

.      I^.Tl  A 

al.7*<   A 

-^r^                 »uor  u 

160  A. 

U         I 

CH     O  • 

t  *: 

zd^  57 

7  ^^  A 

^^^ 

N^^'==^^'°'' 

;    LOT  3 

f 

lifc.SJ  A 

M.IOA. 

IbO  A. 

»'/a. 

« 

» 

80  A 

5CAtt     3»f1.  •    SO  CM- 

Such  a  tract  of  land  is,  of  course,  liable  to  changes 
by  reason  of  accretions  or  reductions  along  its  shore 
line,  but  "meander  lines"  are  generally  run  which 


214     MORTGAGE  LOAN  VALUES 

practically  conform  to  the  sinuosities  of  the  shore  and 
these  enable  the  original  contents  of  the  tract  to  be 
calculated,  although  such  surveys  do  not  always  serve 
to  establish  its  boundaries  (wliich  may  be  the  actual 
shore  line)  ;  this  estimate  of  its  contents,  however, 
should  always  be  made  a  part  of  the  description  of 
the  land;  for  example,  a  proper  description  of  the 
northwest  quarter  of  the  above  plat  would  be  the  Ni^ 
of  the  NW14  tii^d  Lots  1  and  2  of  Fractional  Section 

,   To^\aiship  ,   Range ,   containing   in   all 

116.46  acres,  for  without  this  last  clause  there  would 
be  no  indication  of  its  acreage  except  that  it  is  a  less 
or  greater  amount  than  160  acres  and  there  would  be 
no  way  of  determining  the  facts  except  by  an  examina- 
tion of  the  government  plats  or  by  a  re-survey  of  the 
land. 

Another  insurmountable  obstacle  to  the  uniform 
and  regular  division  and  subdivision  of  lands  accord- 
ing to  our  sj'stem  of  government  survey  lies  in  the 
impossibility  of  fitting  a  scpiare  plat  to  a  convex 
surface  and  this  fact  is  also  responsible  for  many  of 
the  fractional  sections  and  quarter  sections  that  are 
found  in  all  square  surveys  of  large  areas. 

All  initial  lines  are  run  by  surveys  to  the  north  and 
south,  and  in  the  northern  hemisphere  any  extensions 
of  these  lines  necessarily  converge  toward  the  pole 
and  diverge  toward  the  equator ;  although  the  effect 
of  this  variation  from  an  exact  parallel  is  of  slight 
importance  in  limited  areas  and  especially  in  the 
minute  subdivisions  of  cities  and  towns  (for  at  the 
fortieth  parallel  it  only  amounts  to  about  ten  inches 
in  the  mile)  when  the  survey  is  projected  over  a  large 


MORTGAGE  LOAN  VALUES      215 

territory  the  fact  beeonics  of  considerable  importance 
and  therefore  "correction''  lines  are  run  parallel  to 
the  base  lines  and  usually  at  distances  of  24  miles 
apart  for  the  purpose  of  checking  the  growth  of 
these  inaccuracies  before  they  have  become  too  great 
and  of  making  a  new  starting  point  for  the  one  mile 
divisions  between  the  north  and  south  lines  of  the 
sections. 

Owing  to  this  convergence  the  north  line  of  each 
township  will  measure  five  feet  less  in  length  than 
its  south  line,  but  under  the  rules  governing  our  con- 
gressional surveys  each  section  is  made  to  conform  as 
nearly  as  may  be  to  its  proper  shape  and  size,  com- 
mencing with  the  southeast  section,  and  the  excesses 
or  deficiencies  are  worked  into  the  northern  and 
western  tiers  of  sections  in  the  township  and  when 
possilile  into  the  northern  or  western  subdivisions  of 
these  fractional  sections,  thus  making  Section  6  of 
each  township  the  one  most  affected. 

As  surveyor's  lines  are  preferably'  run  to  the  north 
they  are  less  often  extended  for  great  distances  to  the 
south  than  to  the  north  of  a  base  line,  and  variations 
from  the  regulation  size  of  townships  which  are  due 
to  the  convergence  of  lines  are  more  often  in  the  form 
of  deficiencies  than  of  excesses.  Sometimes  these  de- 
fects are  very  considerable,  but  the  contents  of  all 
fractional  sections  or  lots  are  always  stated  in  the 
original  field  notes.  These  fractions,  when  extended 
into  the  quarter  sections,  are  usually  called  "lots"  and 
are  numl)ered  from  the  uortheasternmost  one  in  the 
order  shown  in  the  following  plat : 


216 


MORTGAGE  LOAN  VALUES 


LOT  M 

LOT   i 

LOT    1 

LOT    1 

22V«A 

30  A 

3ft  A 

3oA. 

LOT  5 

S.E  V^ 

5.W.  Vu 

it  %. 

r(h.  '"4 

N.E.y* 

ME  '/* 

>0  A. 

""'•    5fa 

i'/^.a'''^ 

Ho  A. 

LOT  b 

N.E74 

6.V^'/4 

5t    Vq 

30A. 

UOA. 

l&O  A 

LOT  7 

S.E  Vm 

S.V/  Vu 

30  A. 

HO  A. 

« 75     CH > 

SCALE    3  IN.  *  ao  cn. 

The  above  diagram  is  intended  to  show  the  ordinary 
subdivisions  of  the  north  and  west  tier  of  sections  into 
which  tlie  excess  or  defect  of  the  township,  caused  by 
the  convergence  of  meridian  lines,  etc.,  has  been  run, 
but  there  are  other  causes  for  the  existence  of  frac- 
tional sections  and  many  will  be  found  in  other  loca- 
tions in  the  townships,  and  these  are  apt  to  vary  even 
more  than  the  ones  above  mentioned  both  in  size  and 
angles.  These  fractions  are  made  by  the  interference 
of  State  boundaries  or  other  lines  which  have  been 
established  prior  to  the  Congressional  Survey  or  by 
the  projection  of  a  survey  in  one  direction  meeting 
the  projection  in  an  opposite  direction  of  a  survey 


MORTGAGE  LOAN  VALUES 


217 


made  from  a  different  initial  line. 

In  all  siieh  eases,  however,  the  government  survey 
and  field  notes  should  be  referred  to,  for  the  terms  by 
which  any  such  "fractionals"  are  known  reveal  very 
little  either  as  to  their  shape  or  the  quantity  of  land 
which  they  maj"  contain. 

The  following  diagram  illustrates  this  feature  by 
showing  how  the  lines  of  the  Congressional  Survey 
meet  the  lots  at  the  north  point  of  the  previously  made 
grant  by  the  government  to  George  Rogers  Clark  at 
the  "Falls  of  the  Ohio." 


TffP  >  N. 


CLARK'5   CHAHT. 


SCAUE     9/^  IN.'  f  Mi 


XXXIV 

FRACTIONAL    AND    IRREGULAR    DIVISIONS 

The  congressional  survey  of  our  public  domain, 
together  with  certain  other  surveys  made  by  the 
authority  of  this  government  and  that  of  other  orig- 
inal owners,  has  covered  the  greater  portion  of  the 
entire  country  Avith  a  network  of  established  and 
recorded  lines  which  form  a  dependable  basis  for  the 
legal  descriptions  in  all  of  the  local  sulxlivisions  of 
land  in  that  territory. 

The  comments  already  made  will  perhaps  give  a 
fair  general  idea  of  these  surveys,  but  there  is  also  a 
considerable  extent  of  territory,  chiefly  located  in  the 
older  States,  in  which  there  has  been  no  such  system 
used  and  in  which  both  public  and  private  subdivi- 
sions have  been  very  generally  made  in  irregular 
shaped  tracts,  and  some  additional  comment  may 
serve  to  point  out  tlie  difficulties  which  attend  upon 
this  lack  of  system  and  the  resultant  faults  which  fre- 
quently occur  in  the  land  descriptions  in  these  sec- 
tions. 

During  the  time  when  a  very  large  amount  of  the 
land  in  this  section  of  the  country  was  vacant,  many 
grants  were  made  which  did  not  specify  the  particular 
location  nor  the  shape  of  the  tract  granted,  but  only 
the  number  of  acres  and  the  general  location  of  the 
same;  it  was,  of  course,  natural   for  the  grantee  to 

218 


MORTGAGE  LOAN  VALUES      219 

select  the  best  unappropriated  land  in  such  section 
and  if  the  value  of  an  irregular  shaped  tract  or  of  a 
spring  or  Avater  course  or  other  thing  was  greater  to 
him  than  was  the  value  of  a  regular  shape  to  his 
land,  he  would  often  extend  his  lines  to  include  the 
desired  location. 

At  a  later  date  when  a  considerable  portion  of  the 
vacant  laud  had  I)een  appropriated,  more  specific 
locations  were  uanu'd  in  the  grants  and  they  were  fre- 
quently bounded  in  part  by  the  lands  of  John  Doe  and 
Richard  Roe  and  in  part  l)y  vacant  land. 

At  a  still  later  date  the  more  desirable  lands  were 
very  generally  taken  up  except  that  the  lines  of  the 
various  surveys  often  failed  to  include  all  of  the  land 
and  the  remaining  unsold  portion  was  generally  of  a 
very  irregular  shape  owing  to  the  fact  that  the  sur- 
rounding lines  of  the  tracts  did  not  conform  to  one 
anotlier. 

These  matters  are  well  illustrated  by  the  foUoAving 
copies  from  the  State  official  records  which  have  been 
furnished  by  iMajor  Loring  Lee  of  Sumter,  S.  C. 

The  first  of  these,  which  is  a  Lords  Proprietors 
Grant,  appears  to  be  slightly  defective  both  as  to 
stated  consideration  and  the  date,  but  has  been  copied 
as  found  of  record. 

Vol.  38  (Proprietor's  Grants  No.  1)  page  175, 
Office  of  Secretary  of  State  for  State  of  South  Caro- 
lina. 

"By  virtue  of  the  Power  unto  me  given  by  the 
Right  Honble  the  Lords  Proprietors  I  hereby  acknowl- 
edge to  have  sold  unto  John  Seabrooke  Four  hundred 


220     MORTGAGE  LOAN  VALUES 

acres  of  land  at  the  rate  of  Six  pci-  acre  for  wliicli 
said  land  I  have  i-eceived  the  sum  of  Ten  Pounds 
Curt  money  of  Carolina  reserving  to  be  paid  to  the 
Lords  Proprietors  their  heirs  and  assigns  the  sum  of 
twelve  pence  out  of  each  hundred  acres  as  an  acknowl- 
edgement or  Chief  rent  on  the  29th  day  of  September 
yearly  and  every  year  the  said  John  Sealirooke  may 
make  choice  of  the  said  Four  hundred  acres  of  land 
where  the  Lords  rent  is  not  yet  paid  nor  no  Grant 
passed  for  the  same  and  where  no  person  hath  pos- 
sessed claimed  or  Inhabited  the  same.  Always  pro- 
vided that  what  rent  or  arrears  of  rent  is  due  from 
the  land  or  any  part  thereof  is  hereby  reserved  and 
must  be  paid  to  the  Lords  or  their  assigns  by  such 
person  or  persons  that  did  formerly  record  possess  or 
make  use  of  the  same  or  any  Timber  thereon.  I  say 
sold  &  received  the  purchase  money  aforesaid.  Wit- 
ness my  hand  this  thirtieth  day  of  January  1695/6. 

John  Archdale 
Registered  this  thirtieth  day  of  January  1695/6 

Henry  Wigington    Dy  Reg" 

The  second  paper  shows  a  Royal  Grant  by  Geo.  II 
to  Christopher  Singleton  of  a  specific  tract  of  land, 
a  part  of  the  adjoining  lands  being  occupied  and  a 
part  vacant. 

"SOUTH  —  CAROLINA. 

GEORGE  the  Second,  by  the  Grace  of  God.  of  Great- 
Britain,  France  and  Ireland,  KING,  Defender  of  the 
Faith,  and  fo  forth,  To  All  To  Whom  THESE  PRES- 
ENTS  Shall   Come  Greeting:     KNOW  YE,   THAT 


MORTGAGE  LOAN  VALUES      221 

WE  of  our  fpecial  Grace,  certain  Knowledge  and 
mere  Motion,  have  given  and  granted,  and  by  tliefe 
Prefents,  for  us,  our  heirs  and  su;'ceffors,  DO  GIVE 
AND  GRANT  unto 

Christopher  Singleton  his 

heirs  and  affigns,  a  plantation  or  tract  of  Three 
Hundred  Acres  of  Land  in  Craven  County  at  the 
high  Hills  of  Wateree  River  bounded  to  the  North 
West  on  Land  laid  out  for  Porche  to  the  North  East 
and  North  West  on  Land  laid  out  for  Matthew 
Singleton  and  on  all  other  fides  on  Vacant  Land 
And  hath  fuch  fhape,  form  and  marks,  as  appears  by 
a  plat  thereof,  hereunto  annexed:  Together  with  all 
woods,  miderwoods,  timber  and  timber-trees,  lakes, 
ponds,  fifhings,  waters,  water-courfes,  profits^  com- 
modities, appurtenances  and  hereditaments  whatfo- 
ever,  thereunto  belonging  or  in  anywife  appertaining : 
Together  with  pi-ivilege  of  hunting,  hawking  and  fowl- 
ing in  and  upon  the  fame,  and  all  mines  and  minerals 
whatfoever;  faving  and  referving,  neverthelefs  to  us, 
our  heirs,  and  succeffors,  all  white  pine-trees,  if  any 
there  fhould  be  found  growing  thereon :  And  alfo 
faving  and  referving,  to  us,  our  heirs  and  succeffors, 
one  tenth-part  of  mines  of  filver  and  gold  only  •  TO 
HAVE  AND  TO  HOLD,  the  faid  tract  of  Tlirce  Hun- 
dred acres  of  land  and  all  and  fingular  other  the 
premifes  hereby  granted,  with  the  apurteuances.  unto 
the  faid 

Christopher  Singleton  his 

heirs  and  affigns  for  ever,  in  free  and  common  foe- 
cage,  he  the  faid  Christopher  Singleton  his  heirs  or 
affigns  yielding  and  paying  tlierefore,  unto  us.  our 
heirs  and  succeffors,  or  to  our  Receiver-General  for 
the  time  being,  or  to  his  Deputy  or  Deputies  for  the 


222  MORTGxVGE  LOAN  VALUES 

time  being,  yearly,  Ihat  is  to  fay,  on  cvci-y  Iwciity- 
fifth  day  of  ]\larc'ii,  at  tlic  rate  of  three  fliillings 
fterling,  or  four  fhillings  proelamation  money,  for 
every  hundred  aeres,  and  fo  in  proportion  a -cording 
to  the  qnantity  of  acres,  contained  liei-ein  ;  the  same 
to  grow  due  and  be  accounted  for  from  the  date 
hereof.  Provided,  always,  and  this  prefent  (J rant  is 
upon  conditions,  neverlheless,  tluit  the  fa  id 

Christopher  Singleton  his 

heirs  and  affigus  fhall  and  do  within  three  years  next 
after  the  date  of  thefe  prefents,  clear  and  cultivate  at 
the  rate  of  three  acres  for  every  hundred  acres  of 
land,  and  fo  in  proportion  according  to  the  quantity 
of  acres  contained,  or  build  a  dwelling  houfe  thereon, 
and  keep  a  ftock  of  five  head  of  cattle  for  every  five 
hundred  acres,  upon  the  fame,  and  in  proportion  for 
a  greater  or  leffer  quantity:  And  upon  condition, 
that  if  the  faid  rent,  hereby  referved,  fhall  happen 
to  be  in  arrear  and  unpaid  for  the  fpace  of  three  years 
from  the  time  it  became  due,  and  no  diftrefs  can  be 
found  on  the  faid  lands,  tenements  and  hereditaments 
hereby  granted,  that  then  and  in  fuch  cafe,  the  faid 
lands,  tenements  and  hereditaments  hereby  granted, 
and  every  part  and  parcl  thereof,  fhall  revert  to  us, 
our  heirs  and  fucceffors,  as  fully  and  absolutely,  as 
if  the  same  had  never  been  granted.  Provided  also, 
if  the  faid  lands  hereby  mentioned  to  be  granted, 
fhall  happen  to  be  within  the  bounds  or  limits  of 
any  of  the  town f hips,  or  of  the  lands  referved  for  the 
life  of  the  townships  now  laid  out  in  our  said  Province, 
in  purfuance  of  our  Royal  Instructions,  that  then  this 
Grant  shall  be  void,  anything  herein  to  the  contrary 
conlainrd  notwithstanding. 

Given  under  the  Great  Seal  of  our  faid  Province. 
WITNESS     William  Henry  Lyttelton  Esquire 
our  Captain  General 


224     MORTGAGE  LOAN  VALUES 

Governor  and  Cojiiniaiidcr  in  chief  in  and  over  onr 
faid  Province  of  South-Carolina,  this  Eighth  Day  of 
May  Anno  Dom.  1758  in  the  Thirty  Second  Year  of 
our  Reign. 

William  Henry  (L.  M.  S.)  Lyttelton 
Signed  by  his  Excellency  the  Governor  in  Conncil 
And  hath  hereunto  a  plat         William  Simpson    C.  C. 
thereof  annexed,  repre- 
fenting  the  fame,  certified  by 
Egerton  Leigh     Esqr 
Surveyor-General. ' ' 

The  third  paper  is  a  copy  of  a  grant  to  General 
Thomas  Sumter  by  the  State  of  South  Carolina  of  a 
tract  of  land  which  had  been  previously  completely 
surrounded  by  other  claims,  and  serves  to  show  the 
very  irregular  forms  which  resulted  from  this  system 
of  land  division. 

"STATE  OF  SOUTH  CAROLINA 

To  all  to  whom  thefe  Prefents  fhall  come.  Greeting : 
KNOW  YE,  That  for  and  in  confideration  of  Seventy 
two  Pounds  6/8  d  sterling  money,  paid  by 

Thomas  Sumter  Esquire 
into  the  treafury  for  the  ufe  of  this  ftate.  We  have 
granted,  and  by  thefe  prefents  do  grant  unto  the  faid 

Thomas  Sumter  his  heirs  and  affigns,  a  plantation 
or  tract  of  land,  containing  Three  thousand  One  hun- 
dred acres  Situate  in  the  district  of  Camden,  near 
the  High  Hills  of  Santee 

having  fuch  fhape,  form  and  marks  as  are  reprefented 
by  a  plat  hereunto  annexed,  together  with  all  Avoods, 
trees,    waters,    water    courfes,    profits,    commodities, 


(Sxv-at-ii/^  !&i2 


6>  AAlOx^ynJ' '^^h.ZsAjUt, 


MORTGAGE  LOAN  VALUES      225 

appurtenances  and  hereditaments  whatfoever  there- 
unto belonging,  TO  HAVE  AND  TO  HOLD  the  faid 
tract  of  three  thousand  one  hundred  acres  of  land, 
and  all  and  fingular  other  the  premifes  hereby 
granted  unto  the  faid  Thomas  Sumter  his  heirs  and 
affigns,  forever,  in  free  and  common  focage. 

GIVEN  UNDER  THE  GREAT  SEAL  OF  THE 
STATE 

WITNESS  his  Excellency  Thomas  Pinckney 
Efquire,  Governor  and  Commander  in  Chief  in  and 
over  the  faid  State,  at  Charlefton,  this  fifth  Day  of 
March  Anno  Domini  one  thoufand  feven  liundred 
and  Eiglity  Seven  and  in  the  Eleventh  year  of  the 
Independence  of  the  United  States  of  America. 

Thomas  (L.  M.  S.)  Pinclmey 
And  hath  thereunto  a  Plat  thereof  annexed  reprefent- 
ing  the  fame,  certified  by 

F.  Bremar  Pro 

Surveyor-General 
27th  Decem  1786 ' ' 

Throughout  all  of  this  territory  there  are,  of  course, 
numerous  monuments,  the  location  of  which  are  mat- 
ters of  public  record,  and  these,  when  they  have  been 
set  by  proper  authority,  are  held  in  law  to  govern  the 
distances  and  directions  recited  in  the  deed  or  other 
papers  in  which  they  are  used  as  "calls."  These 
monuments,  however,  have  not  been  set  with  reference 
to  anj'^  general  plan  or  system  but  only  according  to 
the  exigencies  of  the  particular  survey  then  being 


226     MORTGAGE  LOAN  VALUES 

made  of  certain  tracts  of  land,  and  because  many  of 
these  monuments  were  of  an  unsubstantial  character 
it  often  becomes  difficult  in  after  years  for  a  surveyor 
to  find  a  definite  starting  point  for  his  work.  There 
were  also  many  errors  in  the  earlier  surveys,  for  the 
reason  that  the  obstacles  and  hindrances  to  good  work 
and  the  difficulty  of  getting  true  measurements  were 
greater  before  the  forests  were  cut  or  the  swamp  lands 
drained. 

In  the  time  when  the  earlier  divisions  of  the  lands 
were  made  in  these  districts  they  were  often  regarded 
as  being  of  comparatively  little  value,  and  errors  in 
their  survey  which  would  now  be  thought  serious 
were  then  regarded  as  unimportant  and  many  '  *  begin- 
nings" and  "calls"  were  very  indefinitely  described, 
— for  instance,  the  title  to  certain  Indiana  farm  lands 
goes  back  to  a  description  reading  "beginning  at  a 
sycamore  tree  on  the  north  bank  of  the  Ohio  River 
about  one  and  one-half  miles  south  of  Six  Mile 
Island ' ' ;  and  valuable  property  in  the  city  of  Dallas,. 
Texas,  is  a  part  of  a  tract  of  land  once  transferred  as 
"beginning  at  the  northeast  corner  of  my  cabbage 
patch. ' '  This  last  example  is  perhaps  rather  an  un- 
usual one  but  the  first  belongs  to  a  class  which  is  not 
at  all  uncommon,  for  in  earlier  times  many  divisions 
and  transfers  were  made  in  the  more  unsettled  dis- 
tricts of  land  which  were  never  surveyed  by  any  sur- 
veyor but  were  described  in  deeds  according  to  the 
rough  measurements  and  estimated  directions  of  lines 
which  were  supposed  to  enclose  a  certain  quantity  of 
land.  Streams  which  have  since  changed  their  course 
were  frequently  made  a  part  of  the  boundaries,  and 


MORTGAGE  LOAN  VALUES      227 

sometimes  the  property  was  simply  described  as  being 
surrounded  by  the  lands  of  other  (named)  owners, 
which  ownership  has  since  greatly  changed,  and  the 
deeds  to  which  may  in  themselves  be  defective. 

In  a  majority  of  such  cases,  however,  the  universal 
recognition  for  many  years  of  certain  land  marks  and 
lines  has  probably  served  to  establish  their  location 
with  such  certainty  as  to  enable  a  competent  surveyor 
to  plat  the  land  and  measure  its  contents  with  suffi- 
cient accuracy  for  practical  purposes,  but  in  com- 
paratively few  cases  can  either  of  these  things  be  even 
approximated  except  by  such  a  survey  for  the  reason 
that  directions  and  distances  must  always  yield  to 
monuments. 

When  these  surveys  are  made  they  often  reveal  an 
overlapping  of  the  lines  given  in  the  recorded  descrip- 
tions and  show  differences  from  the  stated  acreage 
which  have  been  unsuspected  for  years  and  which 
would  probably  never  be  discovered  by  the  office 
work  of  platting  the  lands,  which  is  quite  a  different 
matter  from  their  actual  survey  in  the  field. 

To  illustrate  this  fact,  suppose  certain  property  is 
described  as  being  bounded  by  certain  other  tracts  of 
Real  Estate,  each  of  which  has  been  separately  sur- 
veyed but  at  different  times,  and  suppose  that  the 
description  to  which  the  office  man  has  access  gives  all 
of  the  distances,  directions  and  "calls"  of  these 
various  surveys  but  fails  to  give  the  variation  of  the 
magnetic  needle  at  the  particular  time  and  place  when 
each  survey  was  made  (or  the  dates  of  such  surveys, 
which  to  the  surveyor  is  practically  the  same  informa- 
tion), in  such  a  case,  and  it  is  a  very  usual  one,  it  is 


228      MORTGAGE  LOAN  VALUES 

only  by  going  upon  the  ground  and  finding  one  or 
more  of  the  monuments  and  making  a  survey  from 
them  that  the  missing  information  necessary  to  a  cor- 
rect survey-can  be  gained. 

To  the  uninformed  this  lacking  information  may 
seem  to  be  a  mere  technical  matter,  but  its  very  prac- 
tical nature  will  be  understood  when  two  of  the  funda- 
mental facts  connected  with  the  science  of  surveying 
are  taken  into  account.  The  first  of  these  is  that 
within  much  less  time  tlian  that  in  which  lands  have 
been  surveyed  in  this  country  the  magnetic  needle  has 
marked  both  extremes  of  its  known  variation,  which 
is  not  uniform  and  is  different  at  different  places  but 
which  at  the  supposed  location  of  this  illustration 
(near  the  2ud  principal  meridian  and  the  Ohio  River) 
amounts  to  about  six  and  one-half  degrees  on  each 
side  of  the  true  north,  or  a  total  variation  of  about 
thirteen  degrees;  and  the  second  fact  is  that  each 
variation  of  one  degree  amounts  to  a  divergence  of 
90  feet  in  each  extension  of  one  mile. 

The  following  diagram  will  show  the  relative  loca- 
tion of  two  surveys  made  fi-om  the  same  initial  point 
and  according  to  the  same  statement  of  angles  but  at 
the  times  of  the  greatest  variation  of  the  needle  and 
without  reference  to  such  variations,  and  incidentally 
it  will  show  that  great  discrepancies  in  descriptions 
may  come  to  exist  from  this  cause,  and  that  a  descrip- 
tion which  mathematically  proves  to  itself  to  be  cor- 
rect cannot  always  be  taken  as  absolutelj'  correct,  for 
the  reason  that  it  may  not  physically  fit  the  land 
intended  to  be  described. 


MORTGAGE  LOAN  VALUES 


229 
N. 


wno 


INITfAL    POINT 

SCALt     9  IN.    '  so  CM. 

It  is  very  evident  then  that  when  any  undated 
survey  is  made  a  part  of  a  land  description  it  is  open 
to  the  above  objection  and  that  when  land  is  entirely 
described  by  the  lines  of  the  surrounding  lands  a 
"desk"  examination  is  especially  liable  to  error  not 
only  from  this  cause  but  also  for  the  reason  that  the 
danger  of  mistakes  having  been  made  in  measure- 
ments is  greatly  increased,  and  cases  might  be  cited 
where  a  survey  has  demonstrated  the  fact  that  no 


230     MORTGAGE  LOAN  VALUES 

land  actually  existed  to  which  the  given  description 
would  apply  even  inferentially. 

The  following  description  is  a  very  fair  example  of 
a  large  class  which  will  be  found  in  this  territory 
and  is  one  that  also  shows  the  necessity  of  an  actual 
survej'  of  the  land.  The  description  may  be  found  in 
the  McLean  County,  Kentucky,  records: 

"Beginning  at  a  cottonwood  and  ash  on  Green 
River;  thence  North  %  of  a  degree  West  349  poles; 
thence  North  70  West  16  poles  to  Buck  Creek ;  thence 
down  Buck  Creek  to  Green  River,  and  thence  up  the 
River  to  the  beginning;  excepting,  however,  there- 
from 50  acres  sold  to  T.  L.  and  W.  G.  Atchisson 
bounded  as  follows :  Beginning  at  a  sycamore  on 
Green  River,  running  North  11  East  172  poles;  thence 
North  49  West  471/2  poles  to  a  water  beech  on  Buck 
Creek;  thence  down  Buck  Creek  to  its  mouth;  thence 
up  Green  River  to  the  place  of  beginning. ' ' 

The  only  thing  which  may  be  definitely  determined 
by  a  "desk"  examination  of  this  description  is  the 
fact  that  the  lines  along  Buck  Creek  and  Green  River 
when  taken  together  are  at  least  equal  in  length  to  the 
hypothenuse  of  the  angle  shown  by  the  surveyed  lines 
and,  except  for  the  fact  that  the  original  tract  was 
supposed  to  contain  the  ' '  excepted ' '  50  acres,  this  does 
not  warrant  the  conclusion  that  the  contents  are 
necessarily  as  much  as  would  be  included  by  the  line 
of  the  hypothenuse. 


XXXV 


ILLUSTRATIONS   OF    LAND   DIVISIONS 


The  object  of  these  comments  on  the  division  and 
measurement  of  land  has  not  been  either  to  mention 
or  to  disenss  them  fnlly  (and  this  has  not  been  at- 
tempted), but  it  has  only  been  to  make  sufficient 
explanation  of  such  general  facts  as  may  serve  to 
emphasize  the  importance  which  attaches  to  a  practi- 
cal knowledge  of  these  matters  on  the  part  of  the 
person  who  investigates  Real  Estate  mortgage  secu- 
rities, and  the  following  illustrations  have  been  added 
in  order  to  show  more  clearly  the  differences  which 
will  be  found  in  descriptions  made  under  different 
systems  of  divisions  and  measures : 

The  simplicity  which  is  very  common  in  those  that 
are  based  upon  a  system  of  regular  public  survey  is 
sho^^^l  in  the  following  two  examples,  one  from  the 
government  and  one  from  a  State  survey. 


N.C.  Vm 

160  A. 


N. 


CtMTfR  Of  5Ca»0M 


y.AUL     Vi4  IN.  •  K3    IU>». 

231 


232      MORTGAGE  LOAN  VALUES 

"The  NEi^  of  Sec.  10,  Tw]).  G  N., 
R.  13  W.  of  Indian  Meridian,  Caddo  County, 
Oklahoma.     160  acres." 


5CALE  yii    IM.«  (0   RDs. 

"The  SEi/o  of  Lot  #122  of  the 
17th  land  district  in  Laurens  County, 
Georgia.    IOI14  acres." 

The  more  complicated  nature  of  a  description  by 
metes  and  bounds  of  an  irregular  survey  is  shown 
by  the  following  rather  simple  description  and  sur- 
veyor's certificate  and  map;  although  it  is  simple, 
this  description  has  been  somewhat  lengthened  by  the 
meander  lines  along  Duck  River  and  it  will  be  noticed 
that  in  the  description  distances  are  named  in  terms 
of  "poles"  while  the  surveyor  has  calculated  them  in 
' '  chains. ' ' 

Description 

"Beginning  in  the  Center  of  Duck  River,  the  north- 
east corner  of  the  Allison  tract,  two  small  sycamores 
on  the  East  Bank ;  thence  east  to  a  stake  between  said 
sycamores  and  continuing  in  the  same  course  on  the 
line  known  as  the  Pratt-Holcomb  division  line  142.6 


MORTGAGE  LOAN  VALUES      233 

I)oles  to  a  stake;  tlienee  north  3  degrees  ?Ii  minutes 
east  45.5  poles  to  a  stake;  thence  east  25  poh'S  to  a 
stake,  the  southwest  corner  of  a  20  acre  tract  con- 
veyed by  Arch  Coldwell  to  his  wife  Tennie  G.  Cold- 
well;  thence  north  3  degrees  east  along  the  west  line 
of  said  20  acre  tract,  92.4  poles  to  a  stake  on  the 
north  side  of  the  road  known  as  "The  Sims'  Ford 
Road, ' '  and  crossing  Duck  River  at  the  steel  bridge ; 
thence  south  841/4  degrees  west  15.9  poles  to  a  black 
oak  on  the  south  side  of  said  road;  thence  north  77 
degrees  10  minutes  west  25.75  poles  to  a  beech  on  the 
south  side  of  said  road ;  thence  north  48  degrees  west 
16  poles  to  a  stake,  beech  pointers ;  north  llVo  degrees 
east  2  poles;  thence  west  16  poles  to  a  low  water 
mark,  and  continuing  in  all  22.1  poles  to  the  center 
of  Dtick  River;  thence  up  the  River  with  its  center 
south  361/2  degrees  west  7  poles;  south  29  degrees 
west  12  poles;  south  37  degrees  west  16  poles;  south 
321/2  degrees  west  20  poles;  south  181/4  degrees  west 
4  poles;  south  35  degrees  west  8  poles;  south  49 
degrees  west  8  poles;  south  551/0  degrees  west  14.4 
poles;  south  60  degrees  west  16  poles;  south  62  degrees 
west  16  poles;  south  71 1/2  degrees  west  12  poles; 
south  69  degrees  west  12  poles ;  south  41  degrees  west 
16  poles;  south  12%  degrees  west  12  poles;  south  5% 
degrees  west  8  poles;  south  2I14  degrees  WTst  12 
poles;  south  6%  degrees  west  17.92  poles  to  the  begin- 
ning in  the  center  of  the  river  west  of  a  stake  between 
two  small  sycamores  on  the  bank,  containing  112.91 
acres,  more  or  less." 


234 


MORTGAGE  LOAN  VALUES 


9- 
I 


Scfift^¥t  Kt.  -  10  ch. 


^ 


•♦th. 


LANd    of  A.  Coldwe)! 
113:41      ACRe» 


•ScA 


a 


"•"» 


?;''"^^ 

•?""<. Aiy 


E.    35.65     cii. 


UiM»  kHovgH  M    Piw.-tt-HetcoNb    divnio^   li»*«.. 


County  of  Bedford 
State  of  Tennessee 

The  above  is  a  plat  of  land  sold  by  J.  T.  Allison  to 
Arch  Coldwell  lying  in  the  seventh  civil  district  of 
Bedford  County,  Tennessee.  Surveyed  September 
1st.,  1900. 

(Signed)     J.  L.  Hutson, 

Survevor. 


MORTGAGE  LOAN  VALUES      235 

The  following  description  from  a  deed  (with  a 
sketch  of  the  land)  will  give  an  idea  of  the  old  French 
land  divisions  and  measurements;  it  also  illustrates 
the  fact  that  water  frontage  was  considered  by  the 
early  settlers  to  be  of  greater  importance  than  was  a 
more  convenient  width  of  the  tract  of  land,  this  tract 
being  only  one  arpent  or  192.5  feet  in  width  and 
nearly  sixty-eight  arpents  or  more  than  thirteen  thou- 
sand feet  in  length : 

"Vetalle  Bouchez  and 
wife,  Marie  Odelle 

to 
Amable  Bouchez. 
Warranty  Deed,  $150.00, 
Dated  August  5,  1823, 
Recorded  September  5, 

1823, 
Book  "C,"  Page  210, 
Knox  County  Records. 
Conveys :    All  that  certain  tract,  tenement  or  parcel 
of  land  containing  one  (1)  arpent,  French  measure,  in 
front  on  the  River  Wabash  and  extending  back  the 
same  width  to  the  Cathlenette  swamp,  bounding  on 
the    eastward    lands    now    or    late    of    the    heirs    of 
Francois  Languedoc  and  on  the  westward  lands  now 
or  late  of  Louis  and  Charles  Languedoc,  situate  in 
the  Prairie  de  Grand  Morals,  below  Vincennes,  con- 
taining 67.63  arpents  (57.53  acres)." 

In  this  particular  case  the  French  grant  was  over- 
laid by  the  Congressional  Survey  as  is  shown  below  by 
dotted  lines,  together  with  the  field  notes  of  the 
United    States    Government    Surveyor,    locating    the 


236      MORTGAGE  LOAN  VALUES 

entire  lot  of  which  the  above  described  arpent  (shown 
in  black)  is  the  west  half, 

CLAIM  No.  43 

"Re-surveyed  for  Francois  Languedoc  115.08  acres 
of  land  situated  in  Township  2  and  3  North,  Range  11 
West,  Southwest  of  Vincennes  in  the  Prairie : 

''Began  at  the  corner  of  No.  42  on  the  bank  of  the 
River,  thence  South  51  "West  6.47  down  the  River  to 
a  black  oak  4  inches  in  diameter,  the  corner,  thence 
South  14  East  197.71  to  a  post  at  the  edge  of  the 
Prairie,  thence  North  351/^  East  7.66  to  the  corner  of 
No.  42,  thence  North  14  West  197.08  to  the  place  of 
beginning. ' ' 

Claim  No.  44 

"Re-surveyed  for  Charles  Languedoc  116.13  acres 
of  land  situated  in  the  Prairie  Southwest  of  Vin- 
cennes in  Townships  2  and  3  North,  Range  11  West : 

"Began  at  the  corner  of  No.  43  on  the  bank  of  the- 
River,  thence  down  the  same  South  481/2  West  6.58 
to  a  sycamore  10  inches  in  diameter,  the  corner,  thence 
South  14  East  200.67  to  post  on  the  Cathlenette 
Pond  in  Township  2,  Range  11,  thence  North  3OI/4 
East  8.35  to  the  corner  of  No.  43,  thence  North  111 
West  197.71  to  the  place  of  beginning." 

Each  of  the  above  original  tracts,  containing  115.08 
and  116.13  acres,  or  approximately  135.28  and  136.51 
arpents,  respectively,  were  only  two  arpents  or  385 
feet  in  width  and  about  two  and  one-half  miles  in 
length. 


7.  aN.  «.  u  w. 


5EC.  X 


SEC-   I 


SC«CE  FRENCn       '/ifclN'l  ARPENlV 


237 


eATHLENtnt    3WAMP 


238 


MORTGAGE  LOAN  VALUES 


The  following  sketch  is  typical  of  Spanish-Mexican 
land  divisions — it  outlines  the  John  Turner  league 
and  labor  of  hind  which  is  located  on  the  P>io  River 
in  Live  Oak  County,  Texas: 


MORTGAGE  LOAN  VALUES      239 

Whenever  possible  these  grants  were  located  on 
streams  with  such  water  frontage  as  could  be  obtained 
and  running  back  therefrom  (usually  between  parallel 
lines)  to  contain  the  intended  amount  of  land  (as  is 
shown  in  the  above  sketch  by  the  line  "A.A. "). 

In  deeds  made  by  tenants  in  common  for  the  pur- 
pose of  dividing  the  above  land  into  two  equal  parts 
(as  shown  by  the  line  "B.B."),  the  portion  marked 
**C"  is  described  in  one  deed  simply  as  "the  upper 
one-half  of  said  John  Turner  League  and  Labor"  and 
in  the  other  deed  the  portion  marked  "D"  is  more 
fully  described  as  "the  lower  one-half  of  a  League 
and  Labor  of  land  on  the  right  bank  of  the  Frio  River 
in  Live  Oak  County,  Texas,  originally  granted  to 
John  Turner  and  known  as  Abstract  No.  38." 

"The  portion  of  said  League  and  Labor  hereby 
conveyed  being  the  eastern  or  lower  equal  one-half  of 
said  League  and  Labor.  The  division  line  to  lie  run 
from  the  Frio  River  to  the  South  or  back  line  of  said 
Turner  tract  cutting  said  League  and  Labor  in  two 
equal  portions." 

To  quote  from  a  letter  from  Graham  Dowdell  of 
San  Antonio,  who  examined  the  abstract  of  title  to 
this  land:  "This  grant. was  made  on  July  15th,  1833 
by  the  Government  of  Mexico  to  a  colonist,  brought 
into  Texas  by  one  of  the  empresarios  engaged  in  colon- 
izing before  the  Texas  Revolution;  in  this  particular 
case  the  entire  grant  was  sold  for  $30.00  for  the 
League  of  pasture  land  and  twenty  reales  or  $2.50  for 
the  Labor  or  177%  acres  of  arable  land. 

"In  order  to  make  the  description  in  the  first  deed 
intelligible  anyone  examining  the  title  would  have  to 


240     MORTGAGE  LOAN  VALUES 

know  the  meaning  of  the  words  ' '  upper ' '  and  ' '  lower ' ' 
as  affecting  Mexican  land  grants;  they  have  nothing 
to  do  with  the  direction  indicated  by  the  compass,  nor 
do  they  indicate  valley  as  distinguished  from  "up- 
land." They  relate  to  the  direction  in  which  the 
stream  flows  on  which  the  land  abuts,  consequently, 
when  the  "upper  half"  is  conveyed  it  means  the  half 
of  the  grant  lying  up-stream. 

"In  the  early  days  these  people,  especially  Mexi- 
cans or  Spaniards,  rarely  left  written  wills  when 
they  died.  It  was  equally  rare  for  the  heirs  to  resort 
to  administration  proceedings  upon  the  estate  of  the 
deceased.  Upon  the  death  of  the  original  grantee, 
the  heirs  usually  made  a  parole  partition  of  the  grant, 
dividing  it  into  equal  portions  each  having  an  equal 
frontage  on  the  river,  base  line  width,  running  back 
between  parallel  lines  to  the  back  line  of  the  grant 
and  in  one  Spanish  land  grant  on  the  Rio  Grande  this 
method  of  partition  has  resulted  in  one  of  the  remote 
heirs  of  the  original  grantee  owning  a  strip  of  land 
which  is  only  twenty-five  varas,  or  approximately 
seventy  feet,  in  width  fronting  on  the  river  and  run- 
ning back  betw^een  parallel  lines  for  a  distance  of  fif- 
teen miles. ' ' 

In  the  old  times  immense  tracts  of  land  were  some- 
times granted  by  the  Mexican  Government  to  "em- 
presarios"  who  were  engaged  in  colonizing  that  terri- 
tory which  afterward  became  a  part  of  the  United 
States  and  the  beginnings  and  lines  of  these  grants 
were  often  somewhat  indefinite. 

The  record  describing  the  boundaries  of  one  of  these 
grants  made  in  1826  (Burnet's  Colony)  is  as  follows: 


MORTGAGE  LOAN  VALUES     241 

"Beginning  at  the  town  of  Nacogdoches;  thence  on 
a  North  course,  the  distance  of  fifteen  leagues,  to  a 
point  clear  of  the  twenty  boundary  leagues  parallel 
with  the  river  Sabine,  Avhere  a  land  mark  shall  be 
made;  and  thence  on  a  line  run  west  to  Navasota 
Creek;  thence  down  said  creek  with  its  meanderings, 
by  its  left  bank,  to  the  place  where  it  is  crossed  by 
the  road  leading  from  Bexar  to  Nacogdoches;  thence 
with  said  road  to  fork  of  the  Bull's  Hill  (Lomo  del 
Toro)  road,  before  arriving  at  the  military  post  of  the 
Trinity,  with  said  road  to  its  junction  with  the  old 
road;  and  with  said  old  road  to  the  town  of  Nacog- 
doches and  place  of  beginning. ' ' 


XXXVI 

CONCLUSION 

Various  matters  have  been  mentioned  in  the  fore- 
going pages  but  not  very  fully  commented  upon  at  the 
time,  for  the  reason  that  this  would  have  made  neces- 
sary the  introduction  of  certain  collateral  and  even 
of  seemingly  extraneous  matters  at  places  where  their 
consideration  might  have  been  more  confusing  than 
otherwise. 

Several  of  these  matters  are  of  a  character  that 
would,  no  doubt,  warrant  some  additional  comment 
and  it  is  believed  that  they  might  be  more  clearly  pre- 
sented and  the  relation  that  they  bear  to  the  main 
subject  made  more  apparent  by  treating  them  in 
greater  detail  and  as  separate  parts  of  the  subject, 
but  it  is  also  believed  that  such  mention  of  these  mat- 
ters as  has  been  made  will  serve  the  interests  of  thrfse 
who  are  engaged  in  the  business,  and  incidentally  the 
general  interests  by  inducing  a  closer  study  of  the 
best  practices  and  policies  to  be  followed. 

To  persons  who  are  familiar  with  the  business  of 
making  or  buying  mortgage  loans,  it  may  seem  super- 
fluous to  state  that  it  is  important  for  those  who 
engage  in  it  to  be  well  equipped  in  Imowleclge  and 
suited  in  temperament  for  the  work;  nevertheless  it 
is  true  that  many  persons  who  are  ill  fitted  in  either 
or  both   respects,   consider  themselves   capable   and, 

242 


MORTGAGE  LOAN  VALUES      243 

entering  the  mortgage  loan  field,  act  with  confidence, 
in  matters  wherein  the  more  experienced  lender  or 
investor  uses  much  greater  caution. 

There  is  probably  no  other  important  line  of  busi- 
ness for  which  so  many  persons  of  limited  experience 
therein  consider  themselves  to  be  fitted;  persons  who 
for  years,  perhaps,  have  been  absorbed  in  other  af- 
fairs, become  favorably  impressed  with  the  Real 
Estate  mortgage  business,  and,  believing  the  invest- 
ment of  money  in  such  securities  to  be  a  compara- 
tively simple  matter,  enter  this  field  and  undertake 
the  work  themselves,  or  employ  other  equally  inexpe- 
rienced persons  to  do  it  for  them. 

These  are  often  persons  who  are,  in  a  general  way, 
well  informed,  and  if  they  have  made  a  few  loans  with 
which  they  have  had  a  favorable  experience — loans, 
for  example,  upon  which  the  interest  has  been 
promptly  paid,  and  the  principal,  when  due,  has  been 
either  paid  or  renewed,  their  confidence  in  their 
knowledge  of  the  business  is  sustained,  and  they  at- 
tribute their  good  fortune  to  their  possession  of  a 
skillfulness  which  they  are  convinced  will  be  suffi- 
cient to  insure  an  equal  measure  of  success  with  a 
large  number  of  loans,  with  loans  on  various  classes 
of  property,  and  with  loans  in  divers  locations,  when 
as  a  matter  of  fact  they  are  often  wholly  ignorant  of 
many  of  the  conditions  precedent  to  good  lending  as 
a  business  and  of  those  rules  which  are  of  especial 
force  and  effect  when  the  investor  engages  in  exten- 
sive operations. 

In  this,  perhaps  as  much  as  in  any  other  undertak- 
ing, it  is  tru ;  that  ' '  a  little  knowledge  is  a  dangerous 


244     MORTGAGE  LOAN  VALUES 

thing,"  and  if  the  lender  or  investor  expects  to  reach 

safe  conelnsions  in  all  of  the  various  questions  which 
■will  arise,  it  is  important  that  he  should  know  the 
laws  of  conservative  lending',  have  all  of  the  facts 
before  him  in  each  ease  and  fully  understand  their 
relative  values  and  applieability  to  the  matter  in 
hand. 

His  temperament  should  be  such  that  the  task  of 
assembling,  investigating  and  judging  the  facts  will 
be  attractive  rather  than  irksome  to  him;  he  should 
be  able  to  see  beneath  the  surface  of  favorable  repre- 
sentations, and  beyond  the  limit  of  present  favorable 
conditions;  he  should  be  able  to  decide  each  case 
solely  upon  its  own  merits,  uninfluenced  by  any  out- 
side conditions,  no  matter  how  attractive  they  may 
be,  and  should  know  independently  of  the  opinion  of 
others,  why  in  any  given  case  certain  loan  values  do, 
or  do  not,  exist. 

It  is  not  intended  to  say  that  if  wholly  favorable 
conditions  do  not  exist  losses  will  be  frequent,  for  if 
ordinary  caution  is  used  this  is  not  apt  to  be  the  case, 
but  in  this  business  when  losses  do  occur  they  are 
often  serious  ones,  and  only  a  careful  observance  of 
all  safeguards  (which  should  be  intrusted  to  a  skilled 
lender)  should  be  depended  upon,  and  this  will  make 
negligible  any  danger  of  loss  that  might  otherwise 
exist  and  give  an  additional  value  to  any  loan  or  col- 
lection of  loans. 

Unless  the  investor  himself  has  a  good  working 
knowledge  of  the  necessary  requirements  for  good 
loans  and  good  loan  territory,  he  will  be  more  or  less 
at  the  mercy  of  borrowers  or  their  agents,  and  these 


MORTGAGE  LOAN  VALUES      245 

persons  are  always  interested  parties  who  often  have 
a  very  poor  knowledge  of  what  constitutes  good  mort- 
gage loan  security  and  who  are  sometimes  unscrupul- 
ous although  they  will  be  able  in  almost  every  instance 
to  present  good  credentials  and  will  frequently  l)e 
fluent  and,  to  the  investor,  convincing  talkers. 

If  unfitted  for  the  Avork  himself,  he  will  be  unal^le 
to  pass  upon  the  reports  of  his  assistants  with  any 
degree  of  certainty  as  to  the  value  of  their  work,  and 
he  will  himself  make  many  mistakes,  the  most  com- 
mon of  which  perhaps  will  be  that  of  magnifying  the 
importance  of  some  of  the  minor  rules  of  the  business 
and  applying  them  in  cases  where,  under  the  circum- 
stances, they  are  of  no  real  force.  At  best  he  will 
be  constantly  in  danger  on  the  one  hand  of  refusing 
meritorious  offerings,  and,  on  the  other,  of  making  a 
useless  expenditure  of  time  and  money  in  further 
investigations  of  offerings  which,  if  more  expert,  he 
would  have  condemned  on  the  showing  of  preliminary 
reports. 

Such  a  person  may  succeed  in  avoiding  the  serious 
mistakes  that  will  result  in  an  ultimate  loss  of  capital 
but  if  he  is  in  charge  of  trust  funds  and  is  con- 
scientiously endeavoring  to  obtain  only  high  class  se- 
curities, the  work  will  soon  prove  to  be  a  burden 
which  will  increase  as  his  realization  of  his  own  limita- 
tions increases. 

For  various  reasons  many  poor  loans  are  paid ; 
sometimes  this  is  because  of  the  borrower's  belief,  or 
even  because  of  his  hope,  that  an  equity  which  is 
worth  protecting  remains  in  the  property;  sometimes 
the  loan  is  protected  by  the  personal  responsibility 


246 


MORTGAGE  LOAN  VALUES 


MORTGAGE  LOAN  VALUES      247 

of  the  borrower  outside  of  his  interest  in  the  property 
mortgaged,  and  it  also  very  often  happens  that  a  loan 
is  bettered  because  there  is  an  appreciation  in  the 
value  of  the  security  after  the  loan  is  made. 

Of  course  it  would  be  very  poor  business  sense  for 
the  mortgagee  to  depend  upon  any  such  help  to  make 
his  security  good,  but  it  is  true  that  such  help  often 
does  come  to  his  aid,  and  therefore  losses  are  seldom 
so  frequent  as  would  seem  to  be  unavoidable  to  one 
wlio  contemplates  the  unseen  dangers  which  lie  in  the 
path  of  the  inexperienced  investor,  and  it  may  be 
added  here,  that  this  fact  argues  very  strongly  indeed 
in  favor  of  the  entirely  dependable  character  of  such 
Real  Estate  mortgages  as  have  been  selectd  or  made 
by  persons  who  are  fully  competent  to  do  so. 

In  concluding  these  comments  it  may  not  be  super- 
fluous to  say  that  while  there  is  no  reason  to  suppose 
that  the  desirability  of  city  loans  Avill  be  greatly  dif- 
ferent in  the  future  from  what  it  has  been  in  the  past, 
the  investor  in  farm  loans  may  congratulate  himself 
upon  the  fact  that  as  a  class  such  securities  are  grow- 
ing better — not  greatly  perhaps  in  many  sections,  not 
rapidly  perhaps  in  every  section,  but  growing  steadily 
and  generally  better — a  condition  that  has  been 
brought  al)out  by  a  wide-spread  and  intelligent  effort 
to  make  improvements  in  farming  methods,  in  live 
stock  and  farm  equipment,  in  better  drainage  and  bet- 
ter roads  and  in  everything  else  that  goes  to  make 
farm  life  more  pleasant  and  the  business  of  farming 
more  profitable ;  and  this  effort  is  being  materially 
aided  and  encouraged  by  a  vast  number  of  organiza- 


248     MORTGAGE  LOAN  VALUES 

tions  for  that  purpose,  from  the  Agricultural  Depart- 
ment of  the  United  States  to  the  local  corn  clubs  of 
the  boys,  but  chiefly  by  the  fact  that  the  farmers 
themselves  have  very  generally  awakened  to  their 
opportunities  and  to  the  value  of  improvements  along 
these  lines;  and  the  borrower  on  farm  securities  in 
sections  where  high  interest  rates  prevail  may  congrat- 
ulate himself  upon  tlie  fact  that  with  a  betterment  of 
general  conditions  in  his  section  he  may  look  forward 
with  confidence  to  a  betterment  to  him  of  rates  and 
terms. 

With  a  fuller  knowledge  of  the  subject  he  realizes 
that  it  has  been  the  conditions  surrounding  his  secu- 
rity and  not  the  conspiracy  of  money  lenders  (for 
there  has  been  none)  that  have  "held  him  up";  he 
realizes  that  if  one  section  enjoys  better  rates  and 
terms  than  another  it  is  because  of  good  and  suffi- 
cient and  material  reasons  and  he  has  more  faith  in 
the  efficacy  of  common  sense  improvements  to  bettter 
his  condition  and  less  in  such  methods  as  the  destruc- 
tion of  surplus  crops,  in  organized  efforts  to  arbitrar- 
ily govern  production  and  prices,  or  in  the  passage  of 
laws  intended  to  limit  and  control  the  operation  of 
more  powerful  laws.  The  investor  in  farm  loans  may 
also  congratulate  himself  upon  the  fact  that  in  no 
other  line  of  investment  is  the  prospect  of  the  future 
demand  for  money  so  promising.  Enormous  areas  are 
as  yet  agriculturally  undeveloped  except  in  the  most 
elementary  Avay,  in  very  few  places  indeed  has  any 
approach  to  full  development  been  made  and  in  no 
other  field  is  the  demand  for  development  more  insist- 
ent or  better  grounded. 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE   UNIVERSITY  LIBRARY 
This  book  is  DUE  on  the  last  date  stamped  below 


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JUn  3     1954 

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DEgS    19SB 
OCT  2  0 1961 


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